Stock market escapes bear clutches in late-day rally

— -- Wall Street barely avoided entering its first bear market since the financial crisis on Tuesday as good news out of Europe triggered a powerful late rally.

Reports of efforts in Europe to ease the debt situation sparked a snapback that gained power in the last hour as bearish traders scrambled to buy stocks. The buying frenzy resulted in the Dow Jones industrial average finishing 153 points higher at 10,809 — a 404-point rise from the depths of the day. Describing the comeback, Joe Saluzzi of Themis Trading says, "It was a face-melter."

The Standard & Poor's 500 index was in bear market territory, being down 20% from its late April 2011 peak, as late as 3:30 ET. But the U.S. market benchmark rocketed 3.2% in the last half-hour and closed up 2.2% at 1124.

The volatility underscores concern about the:

•News from Europe. The non-stop negative news concerning the potential default of Greece and contagion to other nations such as Italy "keeps investors on the edge of their seats," says Chris Johnson of Johnson Research Group. The bad news continued, even after the market closed, when Moody's cut its rating on Italy's debt three levels, following a similar cut weeks ago by S&P.

•Vulnerability of corporate earnings. If there's been a bright side to the market, it's been the record-breaking and steadily growing profits from companies. But the market's recent action is suggesting that analysts' forecasts for nearly 14% profit growth in 2012 is too high, says Rod Smyth of RiverFront Investment Group.

•Waning options by policymakers. Investors are increasingly convinced neither the Federal Reserve nor the European Central bank can design a graceful answer to government debt problems, says Karl Mills of Jurika, Mills and Keifer. Many of the options left in Europe, including default or write-offs, aren't "friendly" to asset values.

Despite those fears, though, investors see reasons why the Tuesday's bounceback shows there's still potential the market can show signs of life. Investors who watch stock charts for clues about the market's directions are encouraged when the S&P 500 can hold above the 1100 level, as it did Tuesday, Johnson says.

And if European leaders can craft some answer to the debt problem, that could be the spark that allows stocks to rise 10% to 15% from here, Smyth says. "It's too late to sell. But you ought to be looking for a low in October that's worth buying."