Stocks ended mixed as investors looked for signs that the Federal Reserve may cut interest rates again soon.
"I think it's encouraging that we are kind of stabilizing after last week's turmoil," said Alec Young, equity market strategist at Standard & Poor's. "In the short term, people are trading on the Fed cues. The meeting was positive in that Bernanke seemed willing to use all tools available."
The S&P 500 ended with a modest gain while the Nasdaq Composite outperformed with a gain of 0.50%. The Dow Jones Industrial Average fell about 30 points, trading in a relatively narrow trading range of 126 points.
"I think we have very good value in the marketplace today," said Malcolm Polley, chief investment officer at Stewart Capital Advisors. "If you had cash on the sidelines as we've had ... now is a very good time to be picking among the sectors that haven't done so well because a lot of the babies get thrown out with the bathwater."
Eight of the ten S&P 500 sectors traded higher, including the closely-watched financials sector. Energy stocks extended losses to become the worst performing sector on falling oil prices. Exxon Mobil , a Dow component, fell almost 2%, which weighed on the blue chip index. Consumer staples turned slightly negative. Shares of homebuilders fell following a downgrade from Banc of America Securities.
Comments from Richmond Federal Reserve President Jeffrey Lacker took some steam out of the bulls. Lacker said there are still reasons to remain concerned about the risks to the inflation outlook. He said recent market turmoil only warrants a change in interest rates if it affects the outlook for inflation or growth.
"The last thing people want to hear is some hawkish statement," said S&P's Young. "They don't want to hear about inflation concerns. They feel the Fed ought to be focusing on the weakening economy and the housing problem."
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson met with Senate Banking Committee Chairman Christopher Dodd this morning to discuss the recent financial market volatility.
"The market is grasping for some sort of positive news," Peter Cardillo, chief market economist at Avalon Partners, told CNBC.com. "I think the market is hopeful that today's meeting will produce some sort of action by the Fed, although I'm not convinced a cut is coming in between FOMC meetings."
In a news conference following the meeting, Senator Dodd, a Democratic presidential candidate, said the Fed is working diligently on credit regulatory reform and the central bank was prepared to "use all tools available to them."
"That comment was reassuring in that the Fed won't let people hang out there to dry," said Cardillo.
In an exclusive interview on CNBC, Paulson said the global economy is strong and liquidity will return to normal in financial markets once investors re-price risk.
Treasury prices rose early in the session, sending yields lower, as investors sought safety in T-Bills.
"We really are poised on a knife edge, we could recover or we could go plunging down," said David Jones, Chief Market Analyst at CMC Markets.
The New York Federal Reserve took a modest step to further assist the credit markets by lowering fees on its securities and lending program to 0.5% from 1%.
Wall Street received more earnings reports from retailers.
Target , the No. 2 U.S. discount chain, reported earnings that met Wall Street expectations. Target reported a profit of 80 cents per share, in line with analysts' forecasts, according to Thomson Financial.
BJ's Wholesale Club said second-quarter profit spikes 37%, topping expectations. The company, which operates 175 warehouse-style stores in the U.S., said sales rose 8%.
And Staples , the largest U.S. office supplies retailer, reported a higher quarterly profit on Tuesday, matching Wall Street forecasts. However, the company issued a cautious forecast for the rest of the year.
And in the energy markets, New York light sweet crude fell sharply to close below $70 a barrel after traders realized Hurricane Dean will not seriously affect the oil production and refining facilities on the Gulf Coast.
European Stocks Finish Higher
European stocks finished modestly higher after going back and forth throughout the session.
Concern over weakness in the financial sector dampened sentiment as investors sought the safe haven of government-backed bonds and questioned whether central-bank moves had averted a credit crisis.
The London FTSE-100, Paris CAC-40 and the Frankfurt DAX all closed moderately higher.
Individual stocks have started to take their cue from fundamentals rather than overall market woes, with the Chairman of U.K. home builder Persimmon, John White, told CNBC he is confident demand for new homes will help to offset the impact of higher rates on the market. Shares of Persimmon were lower.
In other corporate news, shares of Swiss engineering group Sulzer gained as its first-half profit met expectations with a 26% increase. The company also gave an upbeat outlook for 2007.
And shares of Carrefour gained on news the French retailer was to sell its 50% stake in Swiss hypermarket operator Distributis.
Asian Stocks Mixed
Asian market were mixed Tuesday, but a softer yen helped Japan to a higher close, while a move by China to let residents invest directly in Hong Kong securities gave the Hang Seng Index a boost.
Investor confidence was slowly recovering after the U.S. Federal Reserve sought to calm markets by slashing a key U.S. bank lending rate on Friday, although concerns about a global credit shortage continued to linger. The latest to get hit by the U.S. mortgage crisis was Capital One Financial, which said it would cut 1,900 jobs and shut down a wholesale mortgage unit.
Tokyo's Nikkei 225 Average closed 1.1% up with exporters such as Canon extending gains while bullish brokerage reports lifted Shin-Etsu Chemical and NGK Insulators. Shares of companies that stand to benefit from strong economic growth in the
"BRICs" nations -- Brazil, Russia, India and China-- were bought, with steel, trading and shipping firms recovering from recent sharp losses, pushing up the index.
South Korea's KOSPI edged up to finish higher, with SK Telecom advancing after it secured a stake in Chinese mobile operator China Unicom, while Korea Exchange Bank gained on speculation of a bidding war for the lender.
Australia's S&P/ASX 200 Index reversed early losses to close 0.6% higher, tracking gains in other Asian markets, with QBE Insurance Group and top miner BHP Billiton leading the way up. Gains in other Asian bourses, including Japan's Nikkei and Hong Kong's Hang Seng Index, had encouraged investors to continue to buy shares that had been oversold in recent weeks.
Hong Kong stocks jumped 4% at the start of trade but fell back in the afternoon session. The rally comes a day after China said its citizens could for the first time invest directly in Hong Kong securities under a pilot program, driving China plays up 5.5% at the open.
China's Shanghai Composite Index hit an all-time high, but Chinese stocks' premiums over Hong Kong-listed stocks plunged after China said its residents could start investing directly in overseas securities.
Singapore's Straits Times Index fell back into the red after making gains earlier in the session. But shares of Neptune Orient Lines, the world's eighth-biggest container shipping firm, were sharply higher on investor hope that stronger freight rates will lift the company's earnings.