Stocks opened lower Tuesday but not as low as futures had indicated amid a rally in bank stocks.
The Dow eked out a gain Monday after Friday's carnage but veteran trader Art Cashin said it was likely the exception not the rule.
"I don’t think yesterday means too much of anything. It’s what the cocktail-napkin charters call an inside day," Cashin, head of floor trading at UBS, told CNBC.
Stocks came under pressure Tuesday after Federal Reserve Chairman Ben Bernanke said late Monday that high energy prices risk increasing inflation.
Bernanke warned that high energy prices pose a risk to overall prices but the central bank would "strongly resist" any tendency for an inflationary psychology to take hold. Many in the market took that as an indication the Fed could raise rates too cool prices.
Light, sweet crude was up more than $3 a barrel earlier, but came off those highs just before the market opened. As the bell rang, oil was up about $1.75 a barrel at just over $136 a barrel. On Monday, oil retreated after Friday's meteoric rise.
Financials rebounded after the Bank Index (BKX) hit a five-year low on Monday.
Washintgon Mutual was up 10 percent after sliding 17 percent on Monday to their lowest price in 16 years amid projections that the nation's largest savings and loan could see its write-downs hit $27 billion by 2011 due to the impact of mortgage-related holdings.
National City shares also jumped on news the Midwest bank chain has reached an agreement with regulators on its ability to manage capital, risk and liquidity.
"I think we put in a double bottom on the financial crisis," Cashin said, but added, "Later, we’re going to roll over and make -– or break to -– a new bottom on the recession."
"Suddenly out of a calm sky, the sky is filled with hawks. They seem to be attacking the market," Cashin said, referencing the Hitchcock classic, "The Birds." "The hawks are everywhere and I can't find a telephone booth to hide in!" Cashin said.
Lehman Brothers , however, skidded more than 6 percent to a five-year low amid continued concerns about the firm's stability. A slew of brokerage firms downgraded their ratings on Lehman stock and lowered price and earnings targets.
Apple rebounded after taking a beating in the prior session amid profit-taking following the release of the new iPhone. Shares of Apple had jumped 50 percent in the last three months.
Citigroup raised Apple's price target to $287 from $248 with a "buy" rating, and Lehman raised it to $234 from $202, maintaining its overweight rating. Apple shares edged higher in premarket trading to $181.75.
Texas Instruments narrowed a quarterly earnings and revenue target range it issued in April because of caution among its chip customers and weak demand for high-end phones. But the stock edged higher in German trading.
In economic news, the trade gap expanded to $60.90 billion in April from a downwardly revised $56.49 billion in March as oil prices surged. Economists had expected the gauge to rise to $59.90 billion. Average prices for imported oil rose $6.96 a barrel, the second highest increase on record.
At the same time, a survey from the National Federation of Independent Businessshowed confidence in the U.S. economy among small business owners to be at its lowest rate since 1980.
TUESDAY: Bernanke speaks
WEDNESDAY: Mortgage applications; crude inventories; Fed's beige book; Treasury budget; Fed's Kohn, Bullard speak
THURSDAY: Import/export prices; retail and food sales; jobless claims; business inventories; natural-gas inventories
FRIDAY: CPI, consumer sentiment
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