Stocks pared their losses Tuesday as a sharp rise in crude inventories sent oil prices lower.
Earlier, banks led the market lower after Freddie Mac posted a loss that was much wider than expected and announced plans to slash its dividend.
Light, sweet crude fell below $118 a barrel after the EIA reported a larger than expected crude build: Inventories jumped by 1.614 million barrels last week to nearly 297 million barrels. Analysts polled by Reuters had expected an increase of just 300,000.
Freddie Maclost $1.63 a share, about three times as big as the loss of 53 cents a share analysts had predicted. The company said it's doubling its provisions for loan losses to $2.5 billion since the end of the first quarter and that it will slash its dividend by as much as 80 percent.
Freddie Mac and Fannie Mae , known as government-sponsored enterprises, hold or guarantee nearly half of the $12 trillion in U.S. mortgages, and have taken a huge hit from the housing downturn. The government has pledged to support both companies through loans and the purchase of stock if necessary.
The news dragged on other financial stocks, with the S&P 500 financial-sector index down 2 percent.
"Freddie Mac was not a vitamin pill this morning. It clearly wasn't good news," Stephen Massocca, co-chief executive at San Francisco-based investment bank Pacific Growth Equities, told Reuters. "When you lower the dividend, people get out of the stock for that reason."
The market was unable to continue Tuesday's rally in which the Dow surged 331 points after the Federal Reserve left its target for interest rates unchanged and released a wide-ranging statement expressing concern about both the slowing economy and inflation.
"A rally of that magnitude on news that's unimportant is probably a bit ahead of itself," said Kevin Ferry, of Cronus Futures Management. "The direction (immediately) after the Fed has not been a good indicator of the direction 48 hours after the Fed. "So look for the market to sit back on lighter volume today. Where it finds support will be more important going forward than the fact that it rallied 300 points in an afternoon."
Dow components fell by about a 2-to-1 ratio, with American International Group , JPMorgan and Citigroup leading decliners.
Techs declined but losses were more modest than in the broader market as the sector got some support from solid numbers from Ciscoafter the bell Tuesday. The networking-gear maker beat expectations and backed its long-term outlook saying it expects the economic slump to be short. Cisco CEO John Chambers went so far as to say that he had "very strong" confidence in the company's forecast for long-term revenue growth of 12 to 17 percent.
Time Warner reported its profit slipped 26 percent, dragged down by its AOL unit. The company said it will splinter off AOL's dial-up Internet and advertising business by early 2009, underscoring its plan to focus on creating content instead of distributing it.
Looking overseas, Tuesday's strong sentiment on Wall Street boosted stocks in Asia, with Tokyo finishing 2.6 percent higher.
European indexes started well, but were mixed in morning trading. Mining stocks were helped by Xstrata's $10 billion unsolicited bid for platinum producer Lonmin.
Still to Come:
WEDNESDAY: Earnings from AIG
THURSDAY: Jobless claims; existing-home sales; consumer credit; Earnings from Barr Pharma, Toyota
FRIDAY: Productivity; wholesale trade; Earnings from Berkshire Hathaway
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