Wall St cuts gains, then bounces back after bogus tweet

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks sharply cut gains before bouncing back on Tuesday following a "bogus" Associated Press report about explosions at the White House.

The benchmark S&P 500 dropped 14 points to as low as 1,563.03 before recovering, all in about five seconds. An AP tweet, which an AP spokesman said was "bogus," had said there were two explosions at the White House.

"We see this every time this type of news comes out: liquidity evaporates quickly. High-frequency traders cancel their orders on even one little tweet," said Dennis Dick, proprietary trader at Bright Trading LLC in Las Vegas. "They provide so much liquidity and don't have obligations like market makers did in the past."

Investors are also on edge following two fatal explosions last week at the Boston Marathon that led to a lockdown in Boston on Friday as police hunted for one of the suspects.

The Dow Jones industrial average was up 120.65 points, or 0.83 percent, at 14,687.82. The Standard & Poor's 500 Index was up 13.77 points, or 0.88 percent, at 1,576.27. The Nasdaq Composite Index was up 32.90 points, or 1.02 percent, at 3,266.46.

Among the day's biggest gainers, Netflix Inc shares jumped 25 percent to $217.68, a day after reporting earnings that beat expectations and strong subscriber growth.

Market volatility had eased this week after last week's big increase in CBOE Volatility Index, or VIX <.VIX>. It hit an intraday peak of 14.87 after the bogus tweet before erasing the gains, said WhatsTrading.com options strategist Frederic Ruffy.

Ruffy also noted option interest in companies that make security software. "There was a buyer of 3,000 September out-of-the-money $20 strike calls on Fortinet at about 1:30 p.m. ET," Ruffy said.

(Additional reporting by Ryan Vlastelica in New York and Doris Frankel in Chicago; Editing by Jan Paschal and Nick Zieminski)