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Rocky rally ends market's worst quarter since 2011

CNBC logo CNBC 9/30/2015 Evelyn Cheng

Stocks closed higher by about 1.5 percent or more Wednesday, following a rally in global markets, but the major averages still posted the worst quarter in four years. 

"I think there's a lot of short covering going on. A lot of people looking at yesterday's dip as a successful retest of the lows," said Marc Chaikin, CEO of Chaikin Analytics. "We have to see how the market closes out this week and the first trading week of October."

He noted that Apple underperformed the major indices with a gain of about 0.8 percent on the day. "The fact that Apple can't get going is negative for the market," he said.

The major averages closed about 7 percent lower for the third quarter, their worst since 2011.

Stocks closed near session highs, recovering into the close after briefly halving morning gains.

The Dow Jones industrial average closed up 235.57 points after leaping as much as 248.47 points. Nike led gains, while Procter & Gamble was the greatest weight on the blue chip index.

The S&P 500 ended at 1,920 after opening below the psychologically key 1,900 level.

Ilya Feygin, senior strategist at WallachBeth Capital, said the S&P came off its highs after hitting resistance 1,912-1,915. "We're trading just kind of technically in between there (and 1,877)."

"I think the data coming up is going to be very important. That's why (there's) volatility," he said. China releases PMI data late Wednesday ET and the key September U.S. nonfarm payrolls report is due Friday morning.

The Nasdaq composite traded about 1.5 percent higher. Earlier, the index rose more than 2 percent, helped by gains of as much as 5 percent in the iShares Nasdaq Biotechnology ETF (IBB).

IBB came off highs to trade about 4 percent higher, holding in a bear market, or more than 20 percent below its 52-week high, after a sharp sell-off in recent weeks.

Apple more than halved gains to trade half a percent higher.

"Nothing has changed fundamentally from yesterday to today except that most of the globe is rallying with weaker-than-expected data points, with the hope of more stimulus from central banks," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management.

"The key thing is, does the early strength ultimately equate to the strength at the end of the day?" he said. "As those shorts are covered that buying interest isn't there."

Soft data in Japan and the euro zone boosted hopes of more stimulus in those regions. Japanese industrial production unexpectedly fell 0.5 percent in August for the second-straight month of declines, government data showed Wednesday. 

For the first time in six months, euro zone prices fell in September from the same period last year, according to the European Union's statistics office Eurostat.

Analysts also noted support for Tuesday's gains from continued signs of improvement in the U.S. labor market.

Ahead of Friday's key nonfarm payrolls data, the September ADP Employment report showed private companies added 200,000 jobs.

"I think that's certainly lending some credibility to the gains that are there," said Paul Springmeyer, senior portfolio manager at the Private Client Reserve at U.S. Bank.

"Investors are being more cautious and tactful, hence the heightened levels of volatility. We've been at pretty subdued levels (of volatility). I think any time you see multiple point percentage swings it's an overreaction," he said.

U.S. stocks closed mixed Tuesday, after plunging nearly 2 percent or more on Monday.

Crude oil settled down 14 cents, or 0.31 percent, at $45.09 a barrel. Oil struggled to rally amid concerns about a hurricane on the U.S. East Coast, news of escalation in the Syrian war, and a report that crude stockpiles rose far more than expected.

Copper spiked amid quarter-end positioning and news of an output cut in Chile. Commodities trading and mining giant Glencore continued to recover with a gain of more than 11 percent.

"It warns of these companies in terms of their debt and how they've managed their balance sheets," said Mark Luschini, chief investment strategist at Janney Montgomery Scott. "That to me is more a symptom of what's happened in the commodity complex than a signal."

Wednesday is the last day of September and the final day of the third quarter, the worst since 2011 according to Barclays. The major U.S. averages are on track for a quarterly loss of more than 7 percent.

"The third quarter to me reflected uncertainty about the Federal Reserve, the uncertainty caused by not knowing how the central bank is going to raise rates. If you get a good labor report that may steel the nerves of the Fed," said David Kelly, chief global strategist at JPMorgan Funds.

Concerns about spillover from slowdown in China and the timing of a Federal Reserve rate hike sent markets into correction territory, or more than 10 percent below their 52-week highs, in late August.

The major U.S. averages recently fell back into correction mode and were close to retesting the August lows Tuesday. The Russell 2000 held below its Aug. 24 low Tuesday.

"You have increasing chatter about the rally into the year-end and that raises the question, what's going to be the catalyst for that?" Luschini said, noting increasing focus on third-quarter earnings reports following Friday's employment report.

"We think this is still in the context of this being a correction rather than a bear market," he said.

"Hopefully we should be looking forward. We just came through a rough, 6-week patch. A lot of it was due not to fundamentals but emotions," Larson said. "We should be looking forward if ADP is any indication on a fairly consistent picture of the labor market."

In other economic news, weekly mortgage applications fell 6.7 percent on a seasonally adjusted basis for the week ending September 25, according to the Mortgage Bankers Association (MBA).

The September Chicago purchasing managers index came in at 48.7, below expectations of 53.0.

Treasury yields fell, with the 2-year yield lower at 0.64 percent and the 10-year yield at 2.06 percent.

The U.S. dollar traded higher against major world currencies, with the euro below $1.12 and the yen at 119.83 yen against the greenback.

U.S. Federal Reserve Chair Janet Yellen is expected to give the opening remarks at a Community Banking Research and Policy Conference at 3 p.m. ET in St. Louis, Missouri. Last week the Fed chief suggested that the central bank was still likely to lift interest rates before year-end.

The Fed chair did not comment on the U.S. economy or monetary policy in the prepared remarks, Reuters reported.

St Louis Fed President James Bullard, New York Fed President Bill Dudley and Federal Reserve Governor Lael Brainard are also scheduled to speak later in the day.

Developments in Washington could fall under the spotlight since the Federal Government runs out of money at midnight — unless Congress and the President approve a new budget or a continuing resolution.

The Senate approved legislation Wednesday to avoid a shutdown, while the House of Representatives is expected to vote on the bill later in the afternoon.

Failure to reach an agreement will result in a government shutdown Thursday.

Gold futures for December delivery settled down $11.60 to $1,115.20 an ounce.

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