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Stocks Close Lower as Rally Loses Steam

Stocks finished lower Tuesday as weakness in technology stocks sucked the air out the earlier rally inspired by oil's drop and the dollar's surge.

The Dow Jones Industrial Average shed nearly 30 points, or 0.2 percent, after being up triple digits for most of the day. The S&P 500 and Nasdaq also declined, with the tech-heavy Nasdaq hit hardest among the three.

"Tech stocks have taken it on the chin today," said Paul Nolte, director of investments at Hinsdale Associates. "I think a lot of this is fallout from the global slowdown," he said, noting that a lot of tech companies make most of their money overseas.

Crude oil dropped $5.75 to settle at $109.71 a barrelafter Hurricane Gustav passed through the Gulf of Mexico, sparing most major oil facilities. The dollar rallied to a more than two-year high against the euro due to the drop in oil prices and worries about a slowdown outside the U.S.

Some analysts said we're going to see oil fall below $100 a barrel, while others say don't hold your breath.

However, Nolte cautioned that it's going to take more than a decline in oil prices to fix this market.

"The GDP number aside, we're in a recession," Nolte said. "The markets, I think, don't reflect that yet."

And, if the stimulus checks are any guide, any extra money consumers get from falling gasoline prices "will probably go to pay off debt as opposed to back in the economy," Nolte explained.

For much of the session, commodity-related stocks — Chevron , Alcoaand ExxonMobil — were the only drags on the Dow. By midafternoon, however, Microsoft , Inteland other techs had joined their ranks, as well as Merck and Caterpillar .

Apple shed 2 percent even as the cult favorite attempted to generate buzz around an event next week, in which analysts expect the company to unveil new iPod modelsand price cuts to existing ones.

Google was among the only techs to finish higher as investors cheered the debut of Chrome, Google's own Web browser aimed at competing with Internet Explorer. The browser is designed to more quickly handle video-rich or other complex Web programs.

Shares of pharmaceutical giants Merck and Schering-Plough retreated following two reports and an editorial in The New England Journal of Medicine about the potential cancer riskassociated with their popular cholesterol-fighting drug Vytorin.

Retailers got a boost from the falling oil prices. Not only did the discounters advance, but beaten-up department stores showed signs of life: JCPenney and Macy's both gained more than 3 percent.

Banks rallied on the thinking that, if consumers have more money, there will be fewer mortgage defaults. Bank of America and Wachovia jumped nearly 5 percent.

Nolte is skeptical about the decline-in-defaults theory.

"Here's the deal: You're still upside-down," he said, explaining that a lot of homes are still worth more than their mortgages right now. "That real-estate dynamic is happening no matter what happens to the price of oil," he said.

Offering a fresh reminder that housing is still not out of the woods yet, Fitch Ratings cut its ratings on preferred shares of Fannie Mae and Freddie Mac , citing concern that if they can't get access to the capital they need it could force them to cut their dividends.

AIG climbed 2.2 percent as insurers enjoyed a relief rally after Gustav passed through with less damage than initially thought.

Lehman Brothers ticked higher after state-owned Korea Development Bank (KDB) confirmed that it was in talks for a possible investment in Lehman. The stock jumped 8 percent out of the gate but pared its gains to just a quarter of a percent by the closing bell amid speculation that Lehman may offer some clarity on the possible sale of its money-management in the next few days.

Airline stocks soared, with Delta , Northwest and United parent UAL all up more than 10 percent.

On the economic front, the Institute of Supply Management reported its gauge of manufacturing activity slippedto 49.9 in August from 50 in July. New orders rose as prices paid fell, but a measure of employment also declined. Construction spending slipped 0.6 percent in July, compared with a 0.3 percent increase in June.

THIS WEEK:

MONDAY-THURSDAY: Republican National Convention

WEDNESDAY: Weekly mortgage applications; ADP employment report; auto sales; factory orders; crude inventories; Fed's beige book; Earnings from Staples, H&R Block and Hovnanian
THURSDAY: Monster employment report; jobless claims; productivity; ISM services index; Fed's Yellen speaks; Earnings from Toll Brothers
FRIDAY: August jobs report; earnings from Nat Semi

Send comments to cindy.perman@nbcuni.com.