Stocks ended lower Wednesday as banks and techs pulled back and comments from the Fed poured water on the market's flicker of optimism.
The Dow Jones Industrial Average shed more than 50 points, or 0.6 percent. The S&P 500 lost 0.6 percent and Nasdaq fell 0.4 percent.
The Federal Reserve expects the economy to improve in the next few months, though it slashed its full-year outlook and raised its projection for unemployment, minutes of its April 29 meeting showed.
Earlier, optimism fueled the market's fire.
Treasury Secretary Timothy Geithner told a Senate panel that financial markets are "starting to heal" and that a program to remove toxic assets from bank balance sheets would begin in the next six weeks.
Some CEOs added to the upbeat outlook: GE CEO Jeff Immelt said there are a number of signs that show the economy is stabilizing, including the fact that demand for commercial lending among small businesses has increased significantly, and Bank of America CEO Ken Lewis said the U.S. economy is on the cusp of a slow recovery, adding: "I think the worst is most likely behind us."
But investors locked in profits, sending major indexes lower, after the Fed minutes, as the gloomy outlook caught many off guard.
That was reflected in the CBOE Volatility Index , which is a closely watched gauge of investor fear, which ticked up in the final hour of trading, ending at 29.08, after falling below 27 earlier in the day. The gauge finished below 30 on Tuesday, the first time its breached that level since Lehman Brothers collapsed in September.
Investors will be watching the VIX closely Thursday to see whether it will continue on its path lower or if the Fed's outlook will leave a permanent dent. If it falls to 25, that could propel the S&P 500 to 1,000, said Richard Sparks, senior analyst at Schaeffer's Investment Research in Cincinnati.
Legendary investor Jim Rogers said beware: The recent rally is largely due to the central bank printing money and another bottom is coming for the market— probably later this year — as fundamental problems in the economy persist.
"I'm not buying shares ... Not at all," Rogers said.
Bank of America rose 2.1 percent after the bank late Tuesday priced 825 million shares at $10 each. The company is scrambling for cash after the government’s stress tests found it short by some $33.9 billion.
But the rally in the rest of the sector began to fade, with Citigroup, JPMorgan and Wells Fargo retreating. Fifth Third remained higher.
Techs were also lower after Hewlett-Packard late Tuesday delivered a gloomy outlookand said it was slashing its workforce by another 2 percent. HP shares were the biggest percentage decliner on the Dow, sliding 5.2 percent.
Home Depot was right there with it at the bottom of the Dow pack, shedding 3.3 percent, after the home-improvement chain earlier this week beat earnings expectations but said sales declined nearly 10 percent.
Investors will look to minutes from the last Federal Open Market Committee meeting for clues on Fed policy over interest rates and quantitative easing. The minutes will be released at 2 pm New York time.
Select retail stocks held onto gains.
Target rose 2.4 percent after the discount retailer beat earnings expectationshelped byinventory controls and cost-cutting measures,and its credit-card business was profitable. Target lost out to rival Wal-Mart at the beginning of the recession but has made a focused effort on promoting consumer staples such as food and pharmacy items and on low prices.
But shares of BJ's Wholesale skidded 4.4 after the wholesale club reported its earnings rose but sales rose just 0.2 percent amid the toll of falling gasoline prices. Still, BJs raised its 2009 outlook as an increase in food offerings has boosted its appeal to cash-strapped consumers.
Deere rose 1.1 percent after the tractor maker reported its profit fell 38 percent and slashed its outlookas worries about the recession have crimped demand for farm equipment.
Investors boosted shares of McDonald's and Procter & Gamble after analysts upgraded the stocks.
General Motors was the biggest percentage gainer on the Dow, up 14 percent, after the automaker said it's expecting three offersfor its German Opel unit.
In the day's economic news: Mortgage applications rose last week, reflecting an increase in demand for home-refinancing loans as interest rates declined.
Crude oilrose nearly $2 to $62.04 a barrel after a report showed crude inventories fell by 2.1 million barrels last week, more than double the 700,000 drop expected.
Shares of Dow energy components ExxonMobil and Chevron declined.
Meanwhile, shares of Solar Winds soared 10 percent on their debut on the New York Stock Exchange. Shares of the network-management-software maker were priced at $12.50, well above the $9.50 to $11.50 range set for the stock.
Still to Come:
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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