Stocks ended a rocky session mixed as a banks rally fizzled and an unexpected drop in housing starts left investors a little shaky. Still, a gauge of fear dropped below a key level.
The Dow Jones Industrial Average shed 29.23, or 0.3 percent, to close at 8,474.85. The S&P 500 lost 0.1 percent, while the Nasdaq gained 0.1 percent.
This came after stocks jumped 2.8 percent Monday, reversing much of last week's slump, following bullish analyst comments on banks.
The CBOE Volatility Index , widely considered the best gauge of fear in the market, dropped to 28.80, the first time the measure finished below 30 since September, just before the market meltdown. In Monday's session, the VIX touched the 30 level, but settled just above that mark.
The VIX's drop has convinced some analysts that fear has left the market but it was unclear whether investors have gotten the message.
Al Goldman, chief market strategist at Wells Fargo, said it's normal for investors to wonder if they went too far too fast but cautioned them not to lose sight of the buying opportunity in front of them.
"The current mood reminds us of the optimistic 10-year-old who, to test his optimism, was given a bag of horse manure for Christmas. Last seen, he had a big smile on his face as he ran around looking for his pony," Goldman explains in his weekly commentary. "We believe there is more good news (ponies) to come."
Goldman Sachs fell 1.4 percent, while Morgan Stanley gained 2.2 percent after the banks applied to pay back TARP funds. The early repayment of the funds may mean that the taxpayers are not getting the returns they were banking on, the New York Times reported.
Overall, banks ended a volatile session mostly lower, with Bank of America down 4.1 percent and Wells Fargo off nearly 6 percent, after the Senate passed a bill to overhaul credit-card rules, including a clampdown on sudden rate increases and hidden fees.
American Express shares shed 5.1 percent following the news. On Monday, the company said it plans to eliminate 4,000 jobs, or 6 percent of its workforce, as higher customer defaults were brought on by the recession.
But Citigroup and State Street each rose more than 3 percent after the banks on Monday announced plans to raise capital.
Home Depot was the biggest percentage decliner on the Dow, falling more than 5 percent, after the home-improvement chain beat earnings expectations but said sales declined nearly 10 percent.
This came a day after rival Lowe's reported its profit declined but beat expectations and raised its forecast. Shares rose another 0.6 percent, after gaining more than 8 percent Monday.
Overall, retail and tech were mostly higher as investors continued to pump money into the cyclical trade.
Saks soared 18 percent after the upscale department-store chain reported a smaller-than-expected lossas cost cuts and inventory paring helped offset weak sales. S&P Equity raised its price target on the stock to $5.50 but kept its "hold" rating.
TJX gained 3.9 percent as the off-price retailer, which operates TJ Maxx and Marshall's stores, reported a better-than-expected profit and said it could beat for the current quarter as penny-pinching shoppers flock to its discount racks. The company said it's trying to capitalize on its position by adding more branded merchandise and scooping up real estate as other stores cut back.
Over in tech land, American depositary shares of Nokia continued to climb, jumping 4 percent, a day after the Finnish handset maker announced it was rolling out three new phones that were capable of accessing the Internet but priced on the lower end of the scale.
And Germany's Vodafone , the world's largest mobile carrier by revenues, said it would speed up cost-cutting efforts after a $9.1 billion impairment charge because of problems in Spain and Turkey. Its ADRs finished down 4.8 percent.
Sprint Nextel advanced 3.4 percent following news that the U.S. carrier plans to sell the Palm Smartphone for $200 in an attempt to claw back some market share from Apple's iPhone and Research In Motion's BlackBerry.
Hewlett-Packard gained 2.4 percent ahead of its earnings. After the closing bell, the hardware and software maker hit its target but delivered a gloomy outlook. Its shares fell in after-hours trading.
General Motors shot up 7.6 percent as the automaker moves closer to what some say is imminent bankruptcy and as the government prepares to implement strict new fuel standards.
GM CEO Fritz Henderson said auto sales remain weak: "At this point, May feels a lot like April," were his exact words.
Shares of rival Ford gained 2.4 percent after starting the day lower.
In today's economic news, housing starts tumbled 12.8 percentto an annual rate of 458,000 units in April, after an 8.5-percent drop in March. That was the lowest on record and much lower than the 520,000 pace economists had expected. Building permits, a gauge of future activity, also dropped to a fresh record low.
Still to Come:
WEDNESDAY: Weekly mortgage apps; weekly oil inventories; Fed minutes; Fed's Plosser speaks; Earnings from Target, Toll Brothers and BJ's Wholesale
THURSDAY: Weekly jobless claims; Philly Fed report; leading indicators; Fed's Plosser speaks; Earnings from Gamestop, Hormel, Gap and Aeropostale
FRIDAY: Earnings from Campbell Soup
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