U.S. stocks finished flat Tuesday as investors took a breather following the best two-day rally on Wall Street since November.
The Dow Jones Industrial Average shed one-tenth of a percentage point, a miniscule drop, but enough to snap the blue-chip index's winning streak. The tech-heavy Nasdaq fared slightly better, gaining 0.6 percent, after an upbeat report on chip maker Qualcomm. The Nasdaq, which emerged from bear-market territory a day earlier, logged its best three-day percentage gain since March 2003, a cumulative total of 5.8 percent.
Some analysts suggested that recent gains were merely a relief rally following the bailout of Bear Stearns and that today's market action -- or lackthereof -- was a product of profit-taking and bottom fishing.
"You've had a relief rally and now we've got to see if it's warranted," said Tony Dwyer, an equity market strategist at FTN Midwest Securities. "There isn't enough proof that the worst is behind us," so there's some hesitancy, Dwyer said. "Saving [banks] from going out of business doesn't mean there's growth ahead."
Still, most analysts and traders agree that the Bear Stearns rescue was a turning point.
"The whole mood has changed," Stephen Porpora, managing floor broker at William O'Neil, told CNBC. "The stock market is all about psychology. It’s all about confidence. We’ve established a bottom, we’ve tested that bottom … And now we’re rebuilding that confidence, rebuilding that psychology and it’s starting to be reflected in some of the industry groups and individual stocks already."
Helping to fuel the rally on Monday was news that JPMorgan will raise its bid for Bear Stearns to $10 a share from $2 a share, suggesting that there is more value in financials than previously thought, analysts said.
Of course, it's hard to please Wall Street, and while the $10 a share offer was still warm, there were rumblings for $15 a share. Some analysts suggested that the offer may go higher, but only by a dollar or two, to about where it was trading on Monday.
But Punk Ziegel analyst Richard Bove said JPMorgan isn't underbidding for Bear Stearns. Bove, who was among the first analysts to call for selling financial stocks last July and just last week declared the financial crisis over, said, according to his calculations, JPMorgan is really paying more like $65 a share.
What is most disturbing about this deal is that it uses a great deal of Morgan capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that is best described as sclerotic," Bove wrote in a note to clients.
Bear Stearns shares closed at $10.94 Tuesday, down from $11.25 on Monday. JPMorgan shares also slipped.
The housing market clearly isn't out of the woods yet, which means financial stocks, which rebounded Monday, are not yet a definite buy.
"I see problems on construction and development loans, commercial loans and home equity loans, just to name three," Richard Suttmeier from Rightside.com told CNBC.
JPMorgan Chase and UBS lowered their earnings forecasts for Merrill Lynch amid expectations that the firm will be saddled with more write-downs.
Capital One shares tumbled after a slew of brokerage downgrades.
Merrill Lynch downgraded a trio of local banks -- Bank of America , PNC Financial and Suntrust Banks -- citing the toll that housing problems will take on the banks' lending and home-equity practices. It lowered Bank of America and Suntrust to "sell" from "neutral" and has PNC down to "neutral" from "buy."
Bank of America, the Dow's biggest decliner, shed 3.5 percent.
"The downgrades reflect a weaker earnings outlook [for all three banks] and a recent rebound in their prices driven by [Federal Reserve] rate cutting and other central banking actions, which should ease the pain, but will not preclude a deep and protracted credit cycle, in our view," Merrill research analyst Edward Najarian wrote in a note accompanying the downgrade.
Thornburg Mortgage announced plans to sell up to $1.35 billion of bonds as the "jumbo" mortgage lender tries to stave off bankruptcy.
Mortgage insurer MGIC Investment said it has priced $420 million in stock and $325 million in convertible bonds in an attempt to secure its capital base.
It was a good day for technology stocks.
Merrill Lynch raised its rating on Qualcomm to "buy" from "neutral," saying it expects the telecom-chip maker to benefit from more companies adopting 3G technology and that the company is in a good position to weather the economic slump.
Among some big names in tech, Apple gained 1 percent, while American depositary shares of BlackBerry maker Research In Motion gained 3.7 percent.
Oracle rose 1.5 percent ahead of the software maker's earnings, due out after the closing bell Wednesday.
Earlier, a pair of economic reports ruffled a few of the market's feathers. Consumer confidence hit a five-year lowin March, the Conference Board reported, while expectations for the future tumbled to their lowest since January 1974. U.S. home prices in 20 metro areas fell another 2.4 percent in January.
But Cleveland Rueckert, a market analyst with Birinyi Associates in Stamford, Conn., told Reuters that the consumer-confidence report wasn't as bad as it initially looked and, more importantly, it's typical of a market bottom. "Consumer confidence hit a five-year low. At these levels this is about where we started the current bull market back in 2002-2003."
The dollar dropped against both the euro and yen. The euro ended around $1.56, while the dollar finished at 100.16 against the yen.
Metal and oil prices rebounded Tuesday, snapping a three-day losing streak. Crude oil for May delivery climbed to $101.22 a barrel, while gold jumped to $934.60.
That gave a boost to mining and energy stocks, including aluminum producer Alcoa , Freeport-McMoran Copper & Gold , independent oil and gas producer Devon Energy , and oil-services firm Schlumberger .
Valero Energy , however, slipped nearly 4 percent after the largest independent U.S. refiner, warned that its first-quarter earnings will be sharply lower.
Shares of Clear Channel Communications plunged 19 percent in after-hours trading following a report in the Wall Street Journal that a $19 billion buyout of the radio-station owner was near collapse.
WEDNESDAY: Durable goods; new-home sales; oil inventories; Oracle earnings
THURSDAY: GDP; jobless claims; Lennar earnings; Fed auction
FRIDAY: Personal income and spending; consumer sentiment; KB Home earnings
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