Stocks Finish Mixed; Bond Insurers Plunge

Stocks finished mixed as investors juggled some encouraging economic reports and concerns about the financial sector.

The Dow Jones Industrial Average dropped 12.37, or 0.1 percent, to close at 12390.48. The S&P 500 shed just half a point while the Nasdaq gained more than 22 points, or 0.9 percent.

Stocks had been higher for most of the day but pulled back following news that Ambac and MBIA may have their credit ratings downgraded by Moody's due to concerns about mortgage-related losses and limited new business prospects. Shares of both stocks plunged more than 15 percent.

Already rattled, the market flinched again after Federal Reserve Chairman Ben Bernanke, speaking to students at Harvard, said indications of a rise in long-term inflation expectations are a "significant concern" for the central bank. The operative word being "significant."

Amid a growing chorus of comparisons between the current climate and the 1970s, Bernanke drew a line in the sand, saying there was little chance that wages and prices would chase each other higher the way they did in the 1970s.

And, there was optimism about the bigger market picture.

"We think all the conditions necessary for a bottom were in place in March," Craig Callahan, founder of Icon Advisers, told CNBC. "We think we’re off on a rally now and it’s higher from here," Callahan said. "People often miss rallies because rallies don’t look like rallies and don’t feel like rallies," he said, citing the rally in 2003 in which the market gained 42 percent in eight months but 40 percent of the trading days during that time were down days.

In economic news, the Institute for Supply Management reported its gauge of the service sector grew for a second straight month amid a solid increase in new orders. ADP Employer Services said the private sector added 40,000 jobs in May, well above the 60,000 decline expected by analysts. That gave some traders hope for a good jobs report from the Labor Department on Friday but it's worth noting that the ADP report is frequently at odds with the government report. And U.S. productivity grew at a slightly faster-than-expected pace of 2.6 percent in the first quarter.

Light, sweet crude fell more than $2 to settle at $122.30 a barrel. The EIA reported crude inventories unexpectedly fell by 4.8 million barrels last week but that was largely due to the fact that refiners worked their plants harder to crank out gasoline and distillates, resulting in a larger-than-expected build there. News that India has raised fuel prices also helped depress crude prices.

Guest blogger John Kilduff, senior VP of energy at MF Global, said he thinks we'll see even lower oil prices ahead -- testing $120 and then $110 a barrel -- amid classic "demand destruction" and the recovery in the U.S. dollar.

On Wednesday, the dollar ticked slightly higher against both the euro and yen.

Tech Stocks Shine

Technology stocks were among the day's bright spots after brokerages upgraded price targets on chip makers Xilinx and Altera . and after the ISM reading on the services sector, which raised hopes that business spending will hold up.

Plus, some market watchers said investors were moving into early cyclicals such as tech stocks as they pulled out of commodities.

The top three gainers on the Dow were Disney , American Express and Intel .

General Motors and Bank of America were the biggest decliners.

Bank of America skidded 2.1 percent after Merrill Lynch analysts said the bank may incur mark-to-market writedowns of between $10 billion and $12 billion because of losses at mortgage lender Countrywide Financial .

Lehman Brothers , which has been in the crosshairs of shorts looking to make it another Bear Stearns, rebounded from an early slide, with shares gaining 2.6 percent, after Merrill Lynch upgraded its rating on the stock to "buy" from "underperform."

Lehman has taken steps to clean up its balance sheet, slashing its risky debt by 25 percent and raising $8 billion in fresh capital, according to an internal memo obtained by CNBC. Also, Lehman could be looking at strategic partners overseas, with at least one in South Korea, the Wall Street Journal reported.

Still, options traders scooped up put options on Lehman, which Jon Najarian, founder of optionmonster.com, said was due to worries about next week's earnings.

Lehman, as well as Morgan Stanley and Goldman Sachs