Stocks closed lower as the market pendelum swung back the other way, sending oil prices to a new high and early cyclicals such as financials and retail lower.
The Dow Jones Industrial Average shed nearly 89 points, or 0.7 percent, to close at 12969.54. The Nasdaq and S&P 500 each lost 0.5 percent, though the S&P managed to finish above the key 1400 level.
An early report from the Institute for Supply Management, that showed the U.S. services sector unexpectedly grew in April, should've given the market a slight boost but traders didn't bite.
"The market is overbought," said David Twibell, president of wealth management at Colorado Capital Bank. "It's much less about individual news right now ... we've got to digest the gains we've had and get some ... conviction among buyers that we have seen a bottom in this market as opposed to a snap back," Twibell said.
Still, Twibell said, "I think the bottom is in," and he expects the market to trend higher "if we can get some stability in the dollar ... and bring commodity prices down."
Twibell said there are three things investors should be looking out for to determine when the market has conviction in this upturn: 1) Market breadth, 2) Better volume on the upside, with "pockets of strength ... even on down days," and 3) How the market reacts to news. "I want to see the market react positively to good news and continue to shrug off bad news," Twibell said.
Yahoo plunged 15 percent after Microsoft over the weekend withdrew its offer to buy Yahoo, citing the companies' differences over price. Microsoft had been willing to go to $33 a share but Yahoo wanted at least $4 more. Just before the closing bell, news emerged that Yahoo investors are mulling a proxy fight to oust the company's board.
Yahoo CEO Jerry Yang "is certainly under a lot of pressure now," Roland
Hirschmueller, an equities trader at German brokerage Baader, told Reuters. "His days are numbered, if he doesn't manage to come up with an alternative strategy."
Microsoft could still make a comeback bid, the Wall Street Journal reports, citing the fact that Oracle and PepsiCo walked away from big takeover attempts only to return to the negotiating table later.
Google shares advanced 2.3 percent amid relief that the Internet-search company won't have to contend with the online-advertising behemoth that would result from a Microsoft-Yahoo deal.
General Motors was the biggest decliner on the Dow, shedding 3.6 percent, as the auto maker faces yet another strike -- this time at its Chevy Malibu plant in Kansas.
AIG also dragged on the Dow, sliding 3.4 percent, as financials were hit by a double whammy: News that a downward revision to first-quarter earnings -- to a decline of 15 percent -- was mostly due to financials and comments from one brokerage firm that Bank of Americacould walk away from its offerto buy Countrywide, the nation's largest mortgage lender.
A collapse of the Countrywide deal "would ignite fresh fears that the credit crisis continues to deepen. A lot of people are saying we're in the end, but that's coming from people who would benefit the most from it," Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets, told Reuters. "The stock market is going to sell first and ask questions later."
Retail stocks declined, with Macy's and JCPenney both down more than 4 percent.
Energy was the winning sector of the day, gaining 1 percent, after crude oil topped $120 a barrel for the first time before settling at $119.97.
That spurred talk that the commodities trade might be back. Alcoa gained 2.2 percent, making it the biggest gainer on the Dow. Contract drillers Nabors and Noble , as well as U.S. Steel , all hit new highs.
Energy's ascent grounded airline stocks, with the American Stock Exchange airline index off 2.6 percent. Northwest , Continental and UAL , parent of United, were all down at least 5 percent.
Homebuilders advanced after Hovnanian Enterprises raised its forecast for fiscal 2008 cash flow to more than $300 million from the $100 million it projected in December. KB Home , Pulte Homes and Toll Brothers all rose more than 1 percent.
Morgan Stanley shares dropped 3.2 percent amid news that the banking giant is planning another round of layoffs, finalizing a plan to reduce its workforce by another 5 percent.
In other deal news:
Sprint Nextel, shares rose 11 percent following news that Deutsche Telekom , which owns T-Mobile,is considering a bid for the company. A deal would create the largest U.S. mobile carrier, combining No. 3 Sprint with No. 4 T-Mobile.
Boeing denied a weekend report that its 787 Dreamliner faces further delays.
Marvel soared 9.4 percent after the comic-book icon beat first-quarter earnings expectations and raised its full-year outlook following its weekend box-office smash "Iron Man," which took in $100.75 million.
(See a list of all the latest earnings surprises.)
MONDAY: Anadarko, Cleveland Cliffs earnings; Bernanke speaks on foreclosures
TUESDAY: Indiana, North Carolina primaries; Earnings from Fannie Mae, Cisco and Disney
WEDNESDAY: Mortgage applications; Productivity; Pending home sales; Crude inventories; Consumer credit; Earnings from News Corp., Transocean
THURSDAY: Retail same-store sales; Jobless claims; Wholesale trade; Cablevision earnings
FRIDAY: Trade report
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