Stocks Take Small Step Back

"The market held up pretty well, as the credit system looks like it has started to work again," said Paul Mendelsohn, chief investment officer with Windham Financial. "Some believe we've put in a bottom and some believe the worst is yet to come. The volatility has weakened, though, which is a good thing for investors that are looking to position themselves ahead of the next Fed meeting."

Meanwhile, a report on loans made through the Fed's discount window came out after the close, showing that an average of about $1.2 billion a day was borrowed by banks. Last Friday, the Fed reacted to a crisis in liquidity by reducing the discount rate, the interest rate it charges banks that want to borrow, 50 basis points to 5.75%.

Bank of America, Citigroup (C Quote - Cramer on C - Stock Picks), JPMorgan Chase (JPM Quote - Cramer on JPM - Stock Picks) and Wachovia (WB Quote - Cramer on WB - Stock Picks) have said they each borrowed $500 million from the Fed at that 5.75% interest rate.

"The move by the four major banks to go to the discount window and borrow $500 million apiece helped instill a sense of confidence," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "The amount isn't important. The banks were making an effort to validate the move by the Fed, and that proved to be a positive for the financials."

Breadth weakened from the prior day. On the New York Stock Exchange 3.10 billion shares changed hands, as advancers matched decliners. Volume on the Nasdaq reached 1.65 billion shares, with losers outpacing winners nearly 3 to 2.

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