Rally Loses Steam, Tech Stocks Drag

The air started to come out the market rally as investors worry that the bailout of Fannie Mae and Freddie Mac might not fix the bigger problems with the housing and credit markets.

The U.S. government on Sunday seized control of Fannie Mae and Freddie Mac in what could be its biggest bailout ever. The CEOs of both companies were ousted and the Treasury is expected to put up as much as $200 billion for the rescue effort.

"This [bailout] gave a lot of the banks a nice boost but there wasn't really a broader impact as it does very little to change what's forced the market down in recent weeks, which is that economies are struggling not just in the U.S. but globally — this so-called demand destruction," said Marc Pado, U.S. market strategist and technical analyst at Cantor Fitzgerald in San Francisco.

The Dow Jones Industrial Average shot up like a rocket at the opening bell, surging more than 300 points before pulling back to a sub-200-point gain. (Track the Dow 30 stocks.)

The S&P 500 and Nasdaq were also higher but the tech-heavy Nasdaq was the laggard of the three amid worries about the global slowdown on tech-product demand.

Semiconductor stocks were one of the biggest drags on the Nasdaq after several brokerages downgraded their ratings on National Semiconductor based on the firm's lower profit and weak revenue outlook.

Apple was off about 3 percent ahead of a highly-anticipated event on Tuesday. The speculation swirling around the market is that Apple will unveil new iPod Nanos, more storage on the Shuffle, possibly Bluetooth for some headphones and maybe even  a deal with the Beattles. Sounds interesting but the fact that the stock is languishing today suggests that investors may have a case of Apple fatigue.

Elsewhere on the Nasdaq, shares of UAL , parent of United Airlines, were off about 6 percent, trading at just over $11 a share, after earlier confusion that resulted when a six-year-old Chicago Tribune report was republished on the Florida Sun Sentinel's Web site with a fresh datestamp, prompting false rumors that the company was again filing for bankruptcy. Some quote services showed the stock as being halted at one cent. That trade was later cancelled and the stock was actually halted at $8.97.

Financials leaped out in front, with sharp gains in companies that own a lot of Fannie and Freddie debt, including Citigroup and Bank of America .

AIG , which owns a lot of Fannie and Freddie debt, was initially higher but then reversed course.

Homebuilders also rallied on the news as mortgage rates dropped, spurring hopes for an increase of buyers. Lennar , Pulte Homes and DR Horton were all up more than 10 percent.

Shares of Fannie Mae and Freddie Mac , plunged more than 60 percent, while their debt soared, as investors bet that the bailout would wipe out the companies' stocks but fully guarantee their bonds. The stocks were suspended in pre-market and overseas trading.

The bailout may have given investors some short-term plays but market pros are convinced that it won't be enough to drive the bears out of the market.

Tony Crescenzi of Miller Tabak adds that the bailout was already priced into the market. Where you should be looking, Crescenzi writes, is at the dollar. This bailout will help keep the dollar's rally going, he says.

The dollar hit a one-year high against a basket of currencies following the news.

Crude oil , meanwhile, ticked up 11 cents to settle at $106.34 a barrel.

Officials at Lehman Brothers