Stock Rally Fizzles but Financials Still Shine

Stocks ended lower as a midday rally fizzled by the closing bell. Financials held onto modest gains.

The Dow Jones Industrial Average and S&P 500 index lost 0.3 percent; the Nasdaq shed 0.7 percent.

Helping to erase earlier gains was a recovery in light, sweet crude , which rose 26 cents to settle at $137 a barrel.

Traders were a little edgy as the Federal Reserve kicked off a two-day meetingon interest rates.

Fed-funds futures are pricing in several rate cuts by year end, but that may just be the market getting ahead of itself. Most economists expect the Fed to talk tough on inflation but keep its rate target on hold due to the weakened economy when the central bank issues its decision Wednesday afternoon.

The Fed's job to fight higher prices will be made more difficult by evidence that job losses, so far largely contained in the financial and housing sectors, are likely to spread to other areas of the economy, depressing consumption even further.

The biggest problem in the market these days is a lack of conviction. Rallies get going but no one is confident enough to carry them through to the closing bell. Frankly, it's a miracle financials held their gains today.

And, it's not hard to see why, when the bad news just keeps on coming.

The latest was a profit warning from UPS. UPS shares dropped 6 percent to close at $62.26, the lowest in nearly five years, after the package-delivery service said late Monday that it now expects earnings between 83 cents and 88 cents a share for the second quarter, down from its prior range of 97 cents to $1.04 a share, due to the crunch of high fuel prices.

The UPS warning comes a week after rival FedEx reported it swung to a loss in its fiscal fourth quarter and issued a weak outlook for fiscal 2009.

FedEx and UPS earnings are closely watched as a gauge of the economy as the packages they deliver represent sales from a wide variety of sectors.

Rounding the bend toward the end of the quarter, the outlook for corporate profits is bleak. S&P 500 company earnings are expected to fall at a double-digit pace from a year earlier, according to Thomson Reuters.

Not surprisingly, the Case-Shiller home-price index showed that US home prices extended their record slide in April. In other economic news, the Conference Board said consumer confidence fell to a 16-year low in June. The Richmond Fed reported its index of regional manufacturing activity dropped to minus-12 in June from minus-three in May.

Dow Chemical shed 2.8 percent after the companyannounced itssecond price increase within a month due to surging energy prices. The price increase amounts to as much as 25 percent in certain areas and includes transportation surcharges.

Shares of beaten-up financials got a reprieve. The sector, which is down 12 percent for the month, rose 1.5 percent, making it the best performer among 10 key S&P sector indexes.

Lehman Brothers, rose 6.8 percent, erasing all of Monday's loss and then some.

Citigroup, which announced it was cutting 10 percent of the workforce in its investment bank division, gained 1.6 percent. Washington Mutual shed 2.7 percent after Lehman slashed its price target for the savings and loan from $27.25 to $10.

Shares of Yahoo jumped 2.8 percent amid rumors that talks were back on with Microsoft. Shares of Microsoft slipped.

Meanwhile, shares of Blockbuster finished up 4 percent, after an early jump more than three times that due to speculation that the movie-rental chain's deal to buy Circuit City is disintegrating. A big Circuit City investor said the electronics retailer has actually received buyout interest from several potential biddersincluding Blockbuster.

Kroger jumped 7 percent after the supermarket chain reported a profit that beat expectations as the company used lower prices and gasoline discounts to help lure customers.

And stock-exchange consolidation continued, with NYSE-Euronext buying 25 percent in Qatar's Doha Securities Market to get access to the fast-growing Middle East. The Qatari state will keep the remaining 75 percent stake of the exchange.

Still to Come:

WEDNESDAY: Mortgage applications; durable goods, new-home sales; weekly crude inventories; Fed rate decision; Earnings from General Mills, Monsanto, Bed, Bath & Beyond, Nike, Oracle and RIM
THURSDAY: Jobless claims; GDP (final) with corporate profits; existing-home sales; Kansas City and Chicago Fed reports; ConAgra, Lennar earnings
FRIDAY: Personal income and spending; consumer sentiment; KB Home earnings