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Stocks Follow Rally With Steep Selloff

Sarina Penn

Stocks in New York pulled back sharply Wednesday as a decline in commodities and renewed credit-related fears left Wall Street unable to follow through on the mammoth rally that took place in the prior session.

Following a back-and-forth morning, a steady decline turned into a steep selloff in the afternoon. The Dow Jones Industrial Average closed with a loss of 293 points, or 2.4%, to 12,099.66, wiping out more than half of the index's 420-point surge Tuesday.

The S&P 500 sank 32.32 points, or 2.4%, to 1298.42, and the Nasdaq Composite plunged 58.3 points, or 2.6%, to 2209.96.

Commodity stocks were among the worst performers in the rout. Dow names Alcoa(AA Quote), Chevron(CVX Quote) and Exxon Mobil(XOM Quote) were some of the weakest of the 30 index components.

"It seems we are in a rinse-and-repeat cycle," said Steven Sheldon, CFA and principal with SMS Capital Management. "Every time the market shoots back up people think the worst is over, and then they want to jump back in, only to be disappointed."

"The only difference now," he said, "is that we are certainly further along in the financial crisis."

Kenny Landgraf, president and founder of Kenjol Capital Management, pointed out that since the markets will be closed for Good Friday, traders may be starting to pare back their positions for fear of what may happen between now and Monday.

"Given what happened last weekend, people don't want to be hanging out there, exposed for a three-day weekend," Landgraf said, referring to the rapid collapse of Bear Stearns (BSC Quote) a few days ago.

Overall, stocks' breadth was poor. Roughly 5.4 billion shares changed hands on the New York Stock Exchange, and the Nasdaq saw volume reach 2.32 billion shares, as decliners outpaced advancers 7 to 3.

The declines came as futures in crude oil and gold finally pulled back in earnest after their weeks-long run into record-breaking territory.

Crude finished down $4.94 to $104.48 a barrel even after the U.S. Energy Information Administration reported that crude stockpiles were up by a fraction of what analysts were looking for, rising by just 200,000 barrels last week to 311.8 million.

"It's about time," said James Williams, an economist with energy-research firm WTRG Economics, on the drop in crude. "If you look at total petroleum consumption, it's down 3.2% from a year ago, and that's clearly reflective of a weaker economy. And in the last 30 years, we do not have an example of a U.S. recession that was not accompanied by a drop in oil prices."

He added, "It certainly could be the beginning of a correction, and a return to more fundamental numbers, which would put you to $80 [per barrel] at best."

At the same time, gold futures tumbled $61.60 to $942.60 an ounce, sending down shares of miners Barrick Gold (ABX Quote), Goldcorp (GG Quote), and Newmont Mining (NEM Quote) by 4.3% or more.

"This is quite a hefty pullback," said Bart Melek, global commodities strategist with BMO Capital Markets. He believes the selloff was triggered after the Federal Reserve cut the fed funds target rate by just 75 basis points yesterday, which was less than the full point the market anticipated.

A bigger cut, he pointed out, would have essentially weakened the U.S. dollar even further against other currencies. And the greenback's decline is what has generated so much interest in gold lately.

Meanwhile, credit-market jitters emerged yet again, with Merrill Lynch(MER Quote) diving 11.1% on news that it has sued Security Capital Assurance (SCA Quote). Merrill is seeking to force the bond insurer to stick to its obligations to guarantee risky debt.

That news overshadowed what was otherwise a positive day for financials. Before the bell, the Office of Federal Housing Enterprise Oversight, the regulator of Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote), lowered the excess capital requirements on both, potentially freeing up as much as $200 billion of liquidity for the mortgage market.

A seize-up in the mortgage arena, particularly subprime, was the genesis last year of the credit crisis that regulators and banks are still trying to tame. Fannie and Freddie shares finished higher by 8.8% and 14.9%, respectively.

"With all this liquidity being thrown at financial institutions, it would not be surprising that, once the liquidity crisis ends, the ones that are left standing will be in pretty good condition," said Sheldon.

As for the immediate term, Sheldon said, "Until the next crisis, we may see calm. I think we're in the wait-and-see mode. People are getting a little more cautious about moving in too quickly, and just kind of trying to see how the economy unfolds."

Elsewhere in financials, shares of Visa (V Quote) soared 28.4% in their highly anticipated debut. The company priced its initial public offering at $44 a share, raising $17.9 billion, and the day's trading lifted it $12.50 to $56.50.

In another boost for the financial space, Morgan Stanley (MS Quote) posted a first-quarter profit of $1.53 billion, or $1.45 a share, after the cost of preferred dividends. That represents a sharp decline from last year, but it topped analysts' forecast for a profit of $1.03 a share. The stock climbed 1.4%.

Morgan's results follow suit with Goldman Sachs (GS Quote) and Lehman Brothers (LEH Quote), who in the prior session helped fuel the market's rally with their own better-than-expected numbers.

The surge only intensified after the Fed slashed 75 basis points off both the fed funds target rate and the discount rate. By the end of the day, the Dow had soared 420 points to 12,393. The S&P 500 rose 54 points at 1331, and the Nasdaq leaped 91 points at 2268.

Among other earnings reports, credit-card company Discover (DFS Quote) suffered a 65% profit drop in the fiscal first-quarter earnings after selling its Britain-based Goldfish unit. Stripping out the sale, Discover made 50 cents a share, a dime more than expected. Still, shares lost 12.6%.

Foodmaker General Mills (GIS Quote) was faring better, adding 1.2% after reporting a 61% jump in fiscal third-quarter earnings to $430.1 million. Excluding investment-related gains, adjusted income comfortably beat analysts' estimate.

And Adobe (ADBE Quote), maker of Acrobat and other software applications, also beat analyst estimates as its bottom line swelled to $219.4 million. Shares spiked 9% to $34.75.

Treasury prices were taking back ground lost in the last session. The 10-year note was up 30/32 in price to yield 3.37%, and the 30-year bond soared 2-03/32 in price, yielding 4.22%.

Overseas markets were mixed. Tokyo's Nikkei 225 climbed 2.5% overnight, and the Hang Seng Index in Hong Kong added 2.3%. In Europe, London's FTSE sank 1.1%, Germany's Xetra Dax shed 0.5%, and the Paris Cac gave up 0.6%.