The air started to come out the market rally as investors worry that the bailout of Fannie Mae and Freddie Mac might not fix the bigger problems with the housing and credit markets.
The U.S. government on Sunday seized control of Fannie Mae and Freddie Mac in what could be its biggest bailout ever. The CEOs of both companies were ousted and the Treasury is expected to put up as much as $200 billion for the rescue effort.
"This [bailout] gave a lot of the banks a nice boost but there wasn't really a broader impact as it does very little to change what's forced the market down in recent weeks, which is that economies are struggling not just in the U.S. but globally — this so-called demand destruction," said Marc Pado, U.S. market strategist and technical analyst at Cantor Fitzgerald in San Francisco.
Semiconductor stocks were one of the biggest drags on the Nasdaq after several brokerages downgraded their ratings on National Semiconductor based on the firm's lower profit and weak revenue outlook.
Apple was off about 3 percent ahead of a highly-anticipated event on Tuesday. The speculation swirling around the market is that Apple will unveil new iPod Nanos, more storage on the Shuffle, possibly Bluetooth for some headphones and maybe even a deal with the Beattles. Sounds interesting but the fact that the stock is languishing today suggests that investors may have a case of Apple fatigue.
Elsewhere on the Nasdaq, shares of UAL, parent of United Airlines, were off about 6 percent, trading at just over $11 a share, after earlier confusion that resulted when a six-year-old Chicago Tribune report was republished on the Florida Sun Sentinel's Web site with a fresh datestamp, prompting false rumors that the company was again filing for bankruptcy. Some quote services showed the stock as being halted at one cent. That trade was later cancelled and the stock was actually halted at $8.97.
Financials leaped out in front, with sharp gains in companies that own a lot of Fannie and Freddie debt, including Citigroup and Bank of America .
AIG , which owns a lot of Fannie and Freddie debt, was initially higher but then reversed course.
Homebuilders also rallied on the news as mortgage rates dropped, spurring hopes for an increase of buyers. Lennar , Pulte Homes and DR Horton were all up more than 10 percent.
Shares of Fannie Mae and Freddie Mac, plunged more than 60 percent, while their debt soared, as investors bet that the bailout would wipe out the companies' stocks but fully guarantee their bonds. The stocks were suspended in pre-market and overseas trading.
The bailout may have given investors some short-term plays but market pros are convinced that it won't be enough to drive the bears out of the market.
Tony Crescenzi of Miller Tabak adds that the bailout was already priced into the market. Where you should be looking, Crescenzi writes, is at the dollar. This bailout will help keep the dollar's rally going, he says.
The dollar hit a one-year highagainst a basket of currencies following the news.
Crude oil , meanwhile, ticked up 11 cents to settle at $106.34 a barrel.
Officials at Lehman Brothers are hoping to finalize plans to raise capitaland sell off bad debts sometime this week, though the exact nature of the effort is still in flux, people close to the company tell CNBC. There was also some buzz that the company may be moving closer to selling its Neuberger Berman asset-management unit as company officials called the unit's staff in for a meeting.
Washington Mutual shares jumped after the beleaguered bank ousted CEO Kerry Killinger. He will be succeeded by Alan Fishman, who is now chairman of mortgage broker Meridian Capital Group, the Wall Street Journal reported.
Boeing shares waffled as workers walked the picket line for a third straight day. Analysts estimate that each day of the strike will cost the aerospace giant $100 million in sales and one cent a share in profit.
In merger and acquisition news, cigarette maker Altria Group has agreed to buy UST, the maker of Skoal and Copenhagen smokeless tobacco, for about $10.3 billion in cash.
On this busy trading day with the Fannie-Freddie news, the London Stock Exchange ground to a halt as the worst technical glitch in eight years shut down trading for nearly seven hours.
A rally in banks boosted other European exchanges, with gains of more than 10 percent in UBS , Royal Bank of Scotland, Barclays and Credit Agricole.
Asian stocks also soared, with Seoul gaining as much as 5 percent and the Nikkei closing up 3.4 percent.
MONDAY: Consumer credit; Fed's Fisher speaks
TUESDAY: Pending-home sales; wholesale trade
WEDNESDAY: Weekly mortgage applications; crude inventories
THURSDAY: Import/export prices; international trade; weekly jobless claims; Treasury Budget
FRIDAY: Producer prices; government reading on retail sales; business inventories; consumer sentiment
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