Stocks closed mixed Tuesday after an earlier rally inspired by Warren Buffett swooping into the situation with bond insurers and banks teaming up to stop foreclosures.
The Dow Jones Industrial Average finished with a gain of more than 133 points. The broader S&P 500 index also advanced, while the tech-heavy Nasdaq finished flat.
The market has been so beaten down that investors were looking for any excuse for a bounce, said Ryan Detrick of Schaeffer’s Investment Research. The bank plan coupled with Buffet's offer were "initially acting as a band aid" to bid up the market.
Investors were so giddy that, at one point, Dow was up more than 200 points. In the last hour of trading, however, those gains began to evaporate and the Nasdaq slipped into the red.
"Reality and gravity," said Al Goldman, chief market strategist at A.G. Edwards.
"The market did too much too quickly today," Goldman said. "It broke down during intraday support."
"I think the dominant trend is still down," Goldman said, but he recommends keeping some cash handy. "Whether this is a bear market or stiff correction, sooner or later they bake in more than the problem -- the problem and a half -- and then they create great buying opportunities."
Investors will be tuned to Wednesday morning's report on January retail sales for signs of whether we're moving closer or further from recession. Also due out tomorrow is a report on December business inventories.
The bank plan, orchestrated by Washington Mutual, Bank of America , Wells Fargo, JPMorgan Chase, Citigroup and Countrywide Financial, aims to identify seriously delinquent borrowers and halt the foreclosure process.
Bond insurers Ambac and MBIA got hammered after Buffet told CNBC he has offered to reinsure some $800 billion in municipal bonds. Critics said the plan would take care of the side that isn't a major problem -- municipal bonds -- and leave bond insurers with a portfolio of riskier debt including CDOs.
Insurance stocks rebounded Tuesday, with the S&P insurance index up 2.5 percent. The sector took a pounding Monday after AIG, the world's largest insurer, announced that auditors were questioning the firm's valuation of risky debt. AIG said Tuesday that potential losses on a derivates portfolio aren't significant.
General Motors shares, the Dow's top gainer on Monday, skidded after the auto maker delivered a worse-than-expected earnings report. GM posted an adjusted profit of $46 million, or 8 cents a share, but that included a $1.6 billion tax benefit that GM chairman and chief executive Richard Wagoner, Jr., said analysts didn't know about.
The No. 1 U.S. auto maker also reached an agreement with the United Auto Workers to offer a buyout to all of the union's 74,000 member employees.
In the tech sector, Electronic Arts shares rose more than 5 percent after the videogame publisher said it expects revenue to surge to more than $6 billion in fiscal 2011, a 53 percent increase from the $3.9 billion analysts expect in fiscal 2008.
Yahoo was one of the few stocks stuck in the red all day amid rumors that the company is reaching out to AOL for some sort of alliance as a defense against Microsoft's $44 billion takeover bid. The Times of London suggested Monday that Yahoo may be mulling alliances with other companies, including Google and Disney. An article on CNET's News.com speculates on Microsoft's next move: That the software giant will float a tender offer and then pounce with a proxy fight.
Monsanto shares rose after the agricultural company, which is involved in everything from seeds to herbicides, raised its 2008 earnings forecast.
Schering-Plough also advanced after the drug maker beat earnings forecasts even as special charges from its acquisition of Organon Biosciences weighed down results.
The Kenilworth, N.J., company doesn't break out sales of its cholesterol joint venture with Merck, but sales of the venture's Vytorin cholesterol drug have begun to slip after a study showed the drug is no more effective than an older cholesterol treatment from Merck.
In a conference call following the earnings report, Schering-Plough Chief Executive Fred Hassan said findings from the so-called Enhance trial had been ''mischaracterized,'' and that a full understanding of the data will not be possible until they are formally presented at a major cardiology meeting next month.