Stocks cut their losses to finish flat in choppy trading Tuesday, but Fed Chairman Ben Bernanke's negative comments on the looming "fiscal cliff" put a damper on gains.
"[The Fed] can certainly have a meaningful contribution to supporting recovery, but in the worst case scenario where the economy goes off the broad fiscal cliff, which according to CBO and to our own analysis, the Fed [doesn't have the] tools to offset that," said Bernanke at the Economic Club in New York. "So it's important for congress to address the fiscal issues soon."
The CBOE Volatility Index, widely considered the best gauge of fear in the market, traded above 15.
Among key S&P sectors, techs and energy agged, while health care rose.
Federal Reserve Chairman Ben Bernanke said the "fiscal cliff" poses a threat to the economic recovery, but outlined no further stimulative measures. He also said the budget situation is already hurting the economy and urged Congress to raise the debt ceiling to avoid a "catastrophic default" on the nation's debt obligations.
"We're going to get a deal eventually, but the deal will be horrible for the economy," said Uri Landesman, president of Platinum Partners. "I'm pretty negative going forward—on a technical basis, you could have a rally, but we're headed much lower because the market's been extended for the last 4-1/2 months."
Stocks logged their biggest rally in two months in the previous session, boosted by optimism for a fiscal cliff eal.
Among earnings, H-P reported earnings that beat expectations, but only after excluding a huge accounting charge related to the acquisition of its Autonomy software unit. Shares plunged sharply to their lowest level in nearly 10 years. At least two brokerages downgraded their rating on the stock. (Watch More: H-P's Whitman 'Regrets' Voting for Autonomy Deal)
Campbell Soup declined after the canned soup maker posted lower quarterly earnings, hurt by charges related to its recent acquisition of Bolthouse Farms, but it reaffirmed its full-year forecast.
Salesforce.com is scheduled to post earnings after the closing bell.
Research In Motion climbed after Jefferies raised its rating on the BlackBerry maker to "hold" from "underperform" ahead of the smartphone maker's BlackBerry 10 launch.
News Corp said it will acquire a 49-percent stake in the YES Network, the New York Yankees' regional cable sports channel.
Meanwhile, ratings agency Moody's Investor Service stripped France of its triple-A credit rating and placed it on negative outlook. Markets saw Moody's move as heightening the risk of other triple-A-rated countries such as Germany and the U.S. being downgraded. (Read More: Risk Is Back—French Downgrade Can't Dent Sentiment)
On the economic front, housing starts gained 3.6 percent to a seasonally-adjusted 894,000, hitting its highest rate in more than four years, according to the Commerce Department. Meanwhile, permits slipped 2.7 percent. Pulte, Toll Brothers and Lennar gained.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
WEDNESDAY: Weekly mortgage applications, jobless claims, PMI manufacturing index flash, consumer sentiment, leading indicators, oil inventories; Earnings from Deere
THURSDAY: Happy Thanksgiving! - Markets closed
FRIDAY: Black Friday - NYSE closes at 1pm ET / CME closes at 1:15pm ET
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