Stocks Close Mixed In Choppy Session

Stocks closed mixed after another volatile day that featured lowered outlook for two key insurers, more jitters over credit and mixed results from an effort to shore up financials.

Earlier in the day, an unprecedented move by the Fed to inject liquidity into the market gave incentive to investors looking to buy into the nation's largest investment banks. But market reaction was gilded, with shares bouncing between positive and negative ground throughout the trading day.

Indexes fell after Standard & Poor's lowered its outlook for bond insurers MBIA and Ambac to "negative."

S&P also cut its rating on ACA Financial Guaranty to junk and said it may cut the triple-A rating of Financial Guaranty Insurance triggering a selloff that affected the major indexes. (CNBC.com previously reported in error that MBIA and Amrac had actually been downgraded.) Ambac later said it was satisfied with the change in outlook.

The Fed's bond sale, meanwhile, resulted in an interest rate on the short-term loans of 4.65 percent, compared with the 4.75 percent the central bank charges banks on emergency loans through its "discount" window. The higher-than-expected rate indicated that banks were eager to pad their cash reserves.

Richard Drew / AP

The auction gave the market a quick but short-lived boost and raised the question of whether the Fed again whiffed in an attempt to sooth investor fears.

"The Fed moves, obviously, in the short term are all about perception. We saw that last week," said Randy Carver of Carver Financial Services. "I think economically it's not going to make a huge difference, but from a perception standpoint if we don't see additional liquidity, the market will jerk down again."

Morgan Stanley earnings were the other big story of the day, with the second-largest investment bank showing huge losses from subprime mortgages though the firm will benefit from a $5 billion cash infusion from China.

Morgan Stanley reported it had $9.4 billion in subprime writedown exposure, far worse than the expected $6 billion. However, Morgan also said it had the cash infusion of $5 billion will come after it sold a stake to China Investment, causing shares to move well higher, though trading was mixed across the sector.

"We are way, way oversold on financials, because people are scared. They don't trust it," said Richard Berg, CEO of Performance Trust Capital Partners. "We're looking for professional investors who we respect to come and say valuations are just too low."

Meanwhile, home builder Hovnanian said after the bell Tuesday it lost $7.42 a share, including accounting and land impairment charges, while revenue sank 20 percent and signed contracts dropped 10 percent. The stock, which has been beaten down this year, saw shares tumble.

Energy, Tech Lead Gainers

Shares were up at Exxon Mobil , Chevron and ConocoPhillips and across the energy spectrum as oil surged above $91.50 a barrel.

International Business Machines led Dow components to the plus side as investors looked for bargains in tech stocks, while 3M and McDonald's were the biggest laggards among the blue-chips.

Also in the tech sector, shares of Palm fell sharply after the company on Tuesday reported a quarterly loss and forecast revenue for the current quarter below expectations. The company was hit by a delay in delivery in its Treo 755 smartphone.

Darden Restaurants , owner of the Olive Garden and Red Lobster casual dining establishments, saw its shares tumble after it lowered guidance for 2008.

Student lender Sallie Mae saw its shares plummet after a contentious conference call between CEO Albert L. Lloyd.

And shares of CarMax , the nation's largest dealer of used cars, fell sharply after it reported a lower quarterly profit.

On the plus side, Archer Daniels Midland and Pacific Ethanol