Stocks struggled to hold gains Tuesday as bank stocks rallied but comments from Bernanke hung over the market like a cloud.
The Dow Jones Industrial Average, pulled it off -- barely -- finishing just one-tenth of a percent higher than the prior session's close. The S&P 500 index shed 0.2 percent and the Nasdaq lost 0.4 percent.
Federal Reserve Chairman Ben Bernanke said late Monday that high energy prices risk increasing overall inflation but that the central bank would "strongly resist" any tendency for an inflationary psychology to take hold.
"Everybody's hanging on Bernanke's every last word," said Dave Rovelli, managing director of equity trading at Canaccord Adams. "He's basically telling us he's going to raise rates, and that's not good for the market."
The dollar rose on Bernanke's comments and light, sweet crudedropped more than $3to settle at $131.31 a barrel.
Not surprisingly, Chevron and ExxonMobil were among the top decliners on the Dow.
Coca-Cola was the top gainer on the Dow, jumping 3.9 percent, after Deutsche Bank upgraded its rating on the stock, which is seen as a good defensive play for a tough economy.
Rival soft-drink maker Pepsi gained 3.4 percent after the company said its finance chief would back its 2008 outlook next week.
Indeed, Rovelli said he still likes multinationals, including McDonald's , Hewlett-Packard , IBM and Wal-Mart .
Financials rebounded after the Bank Index (BKX) hit a five-year low on Monday.
Washintgon Mutual jumped 6.9 percent after sliding 17 percent on Monday to their lowest price in 16 years amid projections that the nation's largest savings and loan could see its write-downs hit $27 billion by 2011 due to the impact of mortgage-related holdings.
National City shares gained 3.8 percent on news the Midwest bank chain has reached an agreement with regulators on its ability to manage capital, risk and liquidity.
Rovelli said he doesn't think the rally in financials means anything -- it's just short covering.
The impact of the credit crunch has probably already been absorbed by the market, but the pain isn't over yet, said Art Cashin, floor manager for UBS.
"I think we put in a double bottom on the financial crisis," Cashin told CNBC. But, "later, we’re going to roll over and make -– or break to -– a new bottom on the recession."
"Suddenly out of a calm sky, the sky is filled with hawks. They seem to be attacking the market," Cashin said, referencing the Hitchcock classic, "The Birds." "The hawks are everywhere and I can't find a telephone booth to hide in!" Cashin said.
Lehman Brothers didn't partake in the financial rally, skidding 6.7 percent to a six-year low amid continued concerns about the firm's stability. A slew of brokerage firms downgraded their ratings on Lehman stock and lowered price and earnings targets.
Pharmaceutical stocks took it on the chin with several hitting multiyear lows as the sector, usually a safe haven for investors, faces an array of problems.
"It's a savage bear market in pharmaceutical stocks," Mike Krensavage, who runs Krensavage Partners LP health-care fund, told Reuters. Pfizer closed at $17.94; the last time the stock was in the $17 range was in 1997.
Merck and Bristol-Myers Squibb fell to two-year lows; American depositary shares of France's Sanofi-Aventis dropped to a nearly four-year low.
Apple rebounded after taking a beating in the prior session amid profit-taking following the release of the new iPhone. Shares of Apple had jumped 50 percent in the last three months.
Citigroup raised its price target on Apple to $287 from $248 with a "buy" rating, and Lehman raised it to $234 from $202, maintaining its overweight rating.