Stocks closed modestly lower as worries about a slowing economy stalled a modest rally led by bargain-hunters.
"The tug of war that's going on between the bulls and the bears is over the strength of the underlying economy and the strength of earnings," Quincy Krosby, Chief Investment Strategist at The Hartford, told CNBC.com. "Investors will be focused on the important economic data that's coming out on Friday. If the market can keep hold of Tuesday's gains, even if it's in a tight trading range, that's positive."
Stocks pared earlier gains in the final minutes of the session as bullish sentiment in every sector except energy virtually evaporated. Trading was in a narrow range throughout the session. Comments from the CEO of homebuilder D.R. Horton also contributed to negative sentiment at the close. Don Tomnitz told the Citigroup Industrial Manufacturing Conference that 2007 was going to "suck, all 12 months."
"This is what is called the post-correction blahs," Steven Lord, Chief Investment Strategist at the Trend Investment Group, told CNBC.com. "Everybody's waiting for the next shoe to drop. Typically, we'll go down again and come close to retesting the bottom. Once it bounces from there, then you can say the bottom is in."
The Federal Reserve reported in its Beige Book that the U.S. economy is growing at a modest pace, but about a third of the country is showing some slowing. Housing remained weak, even though there were signs of stabilization in some areas.
The Dow traded positive for much of the afternoon, getting a lift from Hewlett-Packard, which posted a second day of gains after settling a patent suit with Ninestar Image. Dow component Exxon Mobil , as well as other major oil companies, traded up as oil headed higher.
"Look for Value"
"I think this is one of those markets where you cautiously sit back and look for value," Donald Hodges, President of Hodges Capital Management, told CNBC. "Price-to-earnings multiples are not out of line and interest rates are low. So we're still constructive about the market."
"We're seeing the market stabilize after the storm of last week and this is very good news," Hugh Johnson, Chief Investment Officer at Johnson Illington Advisors, told CNBC.com. "To some extent we are waiting for the employment numbers on Friday, but we are stabilizing and rebuilding confidence."
Energy was by far the best performing S&P 500 sector after crude oil and gasoline inventories fell more than expected last week. Declining shares on the New York Stock Exchange edged out advancing shares.
Shares of some subprime lenders rallied on reports that Fremont General is in talks with other buyers to unload its mortgage business. Financial companies in the subprime lending business have been beaten down by nervousness over mortgage defaults.
New York light crude futures rose to trade near $62 a barrel. The Energy Department said crude oil inventories dropped by 4.8 million barrels last week, while gasoline also fell by a larger-than-expectd amount of 3.8 million. Analysts surveyed by Platts were expecting a rise in crude inventories of 1.8 million barrels, a drop in gasoline supplies of 1.6 million barrels and a drop in distillates, which includes home heating oil, of 2.3 million barrels. Distillates dropped by 1.3 million barrels, less than predicted.
"Not Out of the Woods Yet"
"We certainly think we're still in the midst of an intermediate term correction," Stephen Porpora, Managing Floor Broker at William O'Neil, told CNBC. "You have a lot of economic data coming in. We still have the yen currency issues going on. I don't think we're out of the woods and yesterday was not an indication that we are."
Investors saw a weaker-than-expected ADP employment report. The survey revealed U.S. private employers likely added 57,000 new jobs in February, less than the 90,000 consensus from economists polled by Dow Jones.
The report could give the market some indication of how Friday's government payroll numbers will be, although there is doubt amongst traders and investors about how well the ADP report tracks the official numbers.
Treasury prices extended gains following the Beige Book report, sending yields lower.
American Eagle Outfitters said on Wednesday earnings for the crucial holiday quarter rose 40% as it benifitted from an additional week, strong comparable stores sales and good margins. However shares fell as investors reacted negatively to the retailer's guidance.
Europe Closes Higher
In France the CAC-40, rose. Credit Agricole rose, despite missing analysts' earnings expectations. And Groupe Arnault and Colony Capital announced that they took a 9.8% stake in Carrefour, the world's second-largest supermarket retailer, in what could be a strategic move leading to a takeover.
In Germany, Volkswagen took another step towards controlling Swedish firm Scania, as it raised its stake in the company to 20.03% of shares and 35.31% of the voting rights. VW shares rose on the news while the DAX finished higher.
The FTSE 100 reversed course and closed higher.
Asian Markets Mostly Higher; Japan Dips on Yen Worries
The yen edged up against the dollar and other major currencies on Wednesday in cautious trading as investors were concerned that global markets were still fragile following their plunge in the past week.
The Nikkei 225 Average finished lower as shares of leading exporters such as Canon were hit by continuing concerns about the outlook for the U.S. economy.
In South Korea, the Kospi Index rose for a second session on Wednesday, as steelmakers such as POSCO and banks continued to recover from a slump in global markets on belief they had fallen too much compared with their earnings potential.
Australia's S&P/ASX 200 Index finished almost 1% higher, gaining for a second straight session along with a rebound in global markets. Market heavyweights such as BHP Billiton led the advance.
Chinese shares rose 2% with most shares scoring gains, lifted by a recovery in markets worldwide while mutual funds actively bought stocks.
Hong Kong stocks ended lower after late selling erased gains seen for most of they day.
Singapore stocks rallied with gains by Singapore Telecommunications, Southeast Asia's top telecoms firm, property firm Hongkong Land, and banks like United Overseas Bank and Overseas-Chinese Banking Corp.