Stocks in U.S. Struggle for Direction

Updated from 11:57 a.m. EDT

Stocks in New York were having another erratic session Thursday, starting with a rally, then taking a sharp detour southward before buyers re-emerged to lift the averages back to the flat line.

The Dow Jones Industrial Average was up 10 points to 10,620, and the S&P 500 was better by half a point at 1157. The Nasdaq was up 1 point to 2100.

On Wednesday, stocks took a severe beating following the government bailout of insurance firm AIG (AIG Quote), which reminded investors of the severity and scope of the credit crisis. Pessimism on Wall Street was ramping in the wake of the AIG bailout, a bankruptcy for Lehman Brothers (LEH Quote) and a last-minute merger between Merrill Lynch (MER Quote) and Bank of America (BAC Quote).

Ahead of the latest session, more news emerged from the struggling financials space. Washington Mutual (WM Quote) hired Goldman Sachs (GS Quote) to help it prepare for a sale, while private equity firm TPG had helped clear the way for a merger by waiving an anti-dilution clause that would make WaMu pay for any dilution related to a capital raise or buyout.

Meanwhile, The New York Times and other news outlets reported that Morgan Stanley (MS Quote) was in discussions to merge with Wachovia (WB Quote). The Government of Singapore Investment Corp. said it would take a stake in Morgan if approached, and CNBC reported that HSBC (HBC Quote) and China's CITIC Group were also interested. On Wednesday, Morgan Stanley and Goldman Sachs shares both faced pressure as investors wondered if any firm was safe on its own.

The market staged an early relief rally, said Mark Fightmaster, market analyst at Schaeffer's Investment Research. Historically, mergers in the financial sector have drawn a positive reaction from the markets, he said, but "It's just tough to read the market right now."