Stocks closed lower as investors remained cautious ahead of next week's Federal Reserve meeting on interest rates.
"I think the Fed is behind the game and they have to play catch up," said Bill Strazzullo, chief market strategist at Bell Curve Trading. "The bottom line is the Fed has to ease and ease aggressively. The market is telling us it needs easing. The Fed has been wrong focusing on inflation and not growth."
Wall Street is largely expecting an interest rate cut when the FOMC meets next Tuesday and Pimco's Bill Gross helped to bolster that sentiment, telling CNBC that he believes the Fed will lower rates. However stocks moved back and forth of the flatline throughout the session, failing to gain much traction one way or the other.
"It's like the Fed hynotized us over the last few days," said Jim Iuorio, director at TJM Institutional Services. "We had five Fed speeches recently that didn't say anything about a 50-basis-point ease, which is what the market really wants. But, somehow, they've convinced everyone just to be calm."
Volume was light, with many of the S&P 500 sectors seesawing back and forth of the flat level throughout the session. Energy led the buying as the biggest percentage gainer, by far, after crude oil briefly rose above $80 a barrel. Exxon Mobil was one of the largest percentage winners on the Dow. Other blue chips having a good day included Proctor & Gamble, which hit a historic high. Consumer discretionary shares suffered as oil prices rose.
"The long-term history says the market probably just finds a space and moves sideways for a protracted period of time," said Kevin Ferry, chief market strategist at Cronus Futures Management. "What we're faced with right now is still a very delicate situation in the money markets."
Oil prices traded above $80 a barrel for the first time after a much larger-than-expected decline in crude oil supplies. New York light sweet crude futures moved higher after the Energy Information Administration said crude inventories last week fell by 7.1 million barrels. The market expected crude stockpiles to fall by 2.7 million barrels. Gasoline supplies fell by 700,000 barrels, roughly in line with expectations and distallates rose by 1.8 million barrels, also roughly in line with expectations.
Rises in commodities prices will only add to market volatility as investors try to gauge what the Fed will decide at its meeting next week.
"Now with oil back up there, I think we're really going to start to see it affect the marketplace again," said Robert Heller, managing director at Chapdelaine Brokerage. "I think we're waiting for the Fed. Some people think a half a point is built right in and others are saying maybe not so fast."
"If policymakers move too much in one direction, we could have inflation, especially with oil in the mid-70s,"Stephen Leeb, research chairman for The Complete Investor, told CNBC.com. "If it's too little, we could have a recession."
With no major economic news out today, the debate over a possible interest rate cut dominated the discussion on Wall Street.
"It's not a slam dunk," said Darin Richards, chief investment officer at AKT Wealth Advisors. "I still think the Fed is going to reduce rates by 25 basis points as kind of a peace offering to the market to say they understand there are some problems out there."
Treasury prices fell, sending yields higher, with investors unwinding some flight-to-quality bids.
Stocks never ventured far from the flatline from the start of the session in an apparent search for direction.
Remarks by U.S. Treasury Secretary Henry Paulson, a former Goldman Sachs investment banker, that the current confidence crisis was likely to last longer than any other in the previous two decades appeared to give the bears more reason for gloom.
A disappointing guidance adjustment from Texas Instruments after the bell initially put pressure on technology stocks.
The semiconductor maker narrowed its earnings and revenue guidance for the third quarter, just one day after it said it would lay off 191 workers whose manufacturing jobs were eliminated. The stock fell.
European stocks managed to finish moderately higher, while Asian stocks closed mixed, with the Nikkei down slightly after the surprise resignation of Japanese Prime Minister Shinzo Abe.
"In the short term, volatility will still be in the market … we need clarity from the (Federal Reserve) meeting next week," Charlie Morris from HSBC Investments told "Worldwide Exchange."
The CBOE Volatility Index traded lower.
In corporate news, Brazil banned imports of Mattel toys until the government can fully assess whether the U.S. company complies with local safety requirements.
The news came just ahead of today'sCongressional committee hearings on toy safety, with the Mattel CEO among those called to testify. Robert Eckert pledged to improve toy safety and he insisted that Mattel acted responsibly in recalling millions of Chinese-made toys because they contained lead-based paint or small magnets. Mattel shares are down about 17% for the year.