The stock rally triggered by the bailout of Fannie Mae and Freddie Mac fizzled within the first half hour of trading.
The Dow Jones Industrial Average had opened up 120 points, and Fannie and Freddie jumped by more than 20 percent, but within the first few hours of trading, the gains for all three had all but vanished.
The U.S. Treasury and Federal Reserve announced late Sunday a plan to rescue Fannie Mae and Freddie Macin order to boost confidence in the troubled mortgage-finance giants and stave off a meltdown in the market.
Under terms of the plan, Fannie Mae and Freddie Mac will be allowed to borrow directly from the Fed's emergency-lending discount window as regular banks do.
"I've got a feeling that just like that Bear Stearns bailout was a near-term bottoming for the market, this could be another one of those near-term bottoms," Jack Bouroudjian, principal at Brewer Investment Group, said on CNBC.
But Art Cashin, director of floor operations at UBS, cautioned that the rally could be short-lived, as recent opening rallies have fizzled by late morning when short covering tapered off.
"The big risk for the Federal Reserve and Treasury is if the market starts to disbelieve -- if they think that this is merely a lifeboat painted on the side of the ship to be reassuring. If that starts to come apart, they're running out of bullets," Cashin said.
Fannie and Freddie shares experienced a 20-percent pop at the open but the gains quickly evaporated as Wall Street wondered if the bailout would be enough. The stocks had plunged more than 40 percent last week amid fears that the firms, which own or back $5 trillion of debt, accounting for nearly half of the value of all U.S. mortgages, were undercapitalized.
Both Merrill Lynch and Citigroup slashed their price targets on the pair: Merrill cut Fannie to $9 and Freddie to $7, while Citigroup lowered Fannie to $21 and Freddie to $16.
Financials had initially rallied on the bailout news but quickly slipped into negative territory.
The bailout could put more pressure on the U.S. dollar and analysts said an intervention to prop it up could come soon.
Also in the financial sector, Merrill Lynch CEO John Thain is considering selling other investments to drum up capital, not just Merrill’s stakes in financial-information powerhouse Bloomberg and money manager BlackRock, CNBC has learned. Merrill, which reports earnings on Thursday, is expected to post a hefty loss and writedowns that could top $6 billion.
The Office of Thrift Supervision (OTS) shuttered the $32 billion IndyMac, headquartered in Pasadena, Calif., on Friday and a successor institution, IndyMac Federal Bank, will open for business today.
Analysts say more banks may follow into the IndyMac footsteps, as credit losses once concentrated in subprime mortgages spread to other home loans and debt once thought safe.
(Which bank could be next? Click on the video at left.)
Technology stocks had initially opened higher but quickly retreated as Yahoo and Google dragged on the sector.
This just in: Yahoo has rejected Microsoft's offer AGAIN.
Yahoo Chairman Roy Bostock called the latest offer from Microsoft and billionaire investor Carl Icahn "ludicrous," setting the stage for a showdownat Yahoo's annual shareholder meeting on Aug. 1.
Of course, Wall Street is watching how this shakes out for Google , but Google is a little busy at the moment, defending and defining its position on YouTube user identity in a lawsuit brought by Viacom , parent of MTV and Comedy Central.
Apple , meanwhile, bobbed higher in the sea of red in the tech sector, as the company announced that it sold one million units of its new 3G iPhonein its debut weekend.
The bitter war between Bud-maker Anheuser-Busch and Belgian brewer InBev ended with Anheuser embracing an improved, $70 a share offerfrom InBev that would create the world's biggest beer maker.
FedEx may be in talks to buy Dutch mail company TNT, the Financial Times reported.
Asian markets closed lower as the Fannie-Freddie news did not manage to alleviate all the fears over the health of the financial sector, while European stocks were higher, with UK bank Alliance & Leicester jumping more than 50 percent on news of a deal to be taken over.
TUESDAY: PPI; retail sales; NY Fed manufacturing report; business inventories; Fed's Bernanke, Yellen speak; Earnings from J&J, State Street, US Bancorp, Intel, CSX
WEDNESDAY: Mortgage applications; CPI; industrial production; Bernanke speaks; oil inventories; Fed minutes; Fed's Hoenig speaks; Earnings from Delta, Wells Fargo, eBay and Yum
THURSDAY: Jobless claims; housing starts; Philly Fed manufacturing report; natural-gas inventories; Earnings from Coke, JPMorgan, Nokia, PNC Bank, IBM, Microsoft, Capital One and Merrill Lynch
FRIDAY: Earnings from Citigroup, Honeywell
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