US STOCKS-Wall St rebounds modestly, Oracle drags on Nasdaq
* News Corp spinoff to replace Apollo Group in S&P 500
* Stocks rebound after Wall Street Journal story
* Oracle slides after results miss
* Dow, S&P up 0.4 pct, Nasdaq down 0.1 pct
NEW YORK, June 21 (Reuters) - U.S. stocks rose slightly in a volatile Friday session after two days of sharp losses, as investors grappled with the changing outlook for the Federal Reserve's monetary policy.
Shares have slumped since Wednesday when Federal Reserve Chairman Ben Bernanke laid out the Fed's plans to pull back on its $85 billion in monthly asset purchases.
Coming into the day, the S&P 500 had fallen nearly 5 percent from its all-time closing high of 1,669.16 on May 21 and was on track for its largest weekly drop this year. The current pullback is the largest since an 8.9 percent decline between September and November.
However, stocks rebounded from losses later in the day, after the Wall Street Journal published an analysis saying the market may be misreading the Fed's message, and that reduction in bond buying may not come as soon as some expect.
"The market read what it wanted to read but although there was a reaction in stocks, yields aren't moving," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
"It just shows that the equity market is nervous and would react to any headline at this point."
While equities have moved into positive territory in the last hour, the 10-year Treasury yield currently sits at 2.49 percent, only slightly below the day's highs, as investors continue to reset expectations for Fed policy.
Volatility has spiked since May 22 when Bernanke first hinted that the Fed may begin to rein in its stimulus measures, and is expected to continue. The CBOE Volatility Index, a gauge of anxiety on Wall Street, jumped 23 percent on Thursday to 20.49, the first time this year it closed above 20. On Friday it was down 7.6 percent to 18.94.
The Dow Jones industrial average was up 63.66 points, or 0.43 percent, at 14,821.98. The Standard & Poor's 500 Index was up 6.32 points, or 0.40 percent, at 1,594.51. The Nasdaq Composite Index was down 3.73 points, or 0.11 percent, at 3,360.90.
Large bank shares were hit hard as the Treasuries selloff continued, on fears of bank losses linked to their bond holdings. Citigroup dropped 4 percent to $45.97 and Morgan Stanley lost 3.1 percent to $24.37.
"On the very short term basis, the financials have a very close correlation to the market," said Yu-Dee Chang, chief trader of ACE Investments in Vienna, Virginia.
"They've run up so much, I think the momentum is to the downside, the fear of the ending of QE, I think all of that is creating a weakness in the market for financial stocks."
Oracle Corp dropped 8.2 percent to $30.50, a day after the tech giant missed expectations for software sales and subscriptions for a second straight quarter. Oracle was the biggest drag on both the S&P and Nasdaq Composite.
Analysts pointed to the quarterly expiration and settlement of June equity options and futures contracts on Friday as another volatility trigger.
About $14 billion is expected to change hands in trading related to index rebalancing towards the session's close, which could compound volatility, according to Credit Suisse.
S&P Dow Jones Indices said Thursday that News Corp's spinoff - also known as News Corp - will replace Apollo Group in the S&P 500. Apollo shares fell 3.7 percent to $19.00.
China's central bank faced down the country's cash-hungry banks on Friday, letting interest rates spike as it increased pressure on banks to curb rampant informal lending and speculative trading. Some worry that its approach could backfire, creating the potential for defaults and gridlock in the money markets of the world's second-largest economy.