BLOODBATH AVERTED AS FED SOOTHES MARKETS

Despite wild swings between the highs and lows of the day of more than 300 points, Wall Street managed to avoid the carnage that was widely expected and actually carve out a slight gain.

As the markets reacted positively to word of a Federal Reserve-maneuvered rescue of Bear Stearns by JPMorgan Chase, investors and traders yesterday asked themselves whether the collapse of the venerable investment bank marked the end of the credit crunch – or was just the beginning.

The news that JPMorgan was snatching up Bear for pennies on the dollar sent the Dow Jones industrial average skidding down into triple digit territory at the market’s open.

The Fed action further encouraged short sellers to ramp up their bets on other investment banks and brokerages seen as having balance sheets or businesses disproportionately affected by the ongoing credit crunch.

That sent financial stocks tumbling.

Those meltdowns left the Standard & Poor’s 500-stock index with a loss of 11.54 points, or nearly 1 percent, to 1,276.60. The Dow rose 21.16 points to 11,972.25. The tech-laden Nasdaq fell 35.48, or 1.6 percent, to 2,177.01.

Regardless of how the grueling and volatile session ended, market participants spent much of yesterday trying to unravel the much greater puzzle of whether the de facto bailout of Bear will bring Wall Street closer to resolving both the crisis in market confidence and the crisis of liquidity.

“It may be that the collapse of Bear Stearns ends up being that pivotal event of this financial crisis – and the turning point,” said Jeff Kleintop, strategist at LPL Financial. “The Fed has showed us that it wasn’t about to let Bear fail, even if it meant they had to take toxic waste onto their own balance sheet.”

Indeed, while the Federal Reserve’s recent string of initiatives – 60 percent of its $709 billion securities war chest – has yet to produce a noticeable improvement in liquidity, it has managed to improve market sentiment to pare outsize losses early in the session.

Still, the market remains nervous and volatile, and is fraught with many downside risks that will be tough to resolve – even with the Fed’s efforts to improve liquidity and confidence with commitments totaling as much as $430 billion through other auctions, repurchase agreements and the $30 billion for JPMorgan to backstop Bear.