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Updated from 4:04 p.m. EST

Stocks closed fractionally lower Wednesday, and with a lack of new economic or major earnings releases, investors remained focused on the implications of the

Federal Reserve's

subtle shift in policy on Tuesday.


Dow Jones Industrial Average

lost 1.56 points, or 0.02%, to 9921.86, one day after touching the 10,000 mark for the first time in 18 months; the

S&P 500

slipped 1.13 points, or 0.1%, to 1059.05; and the

Nasdaq Composite

fell 3.67 points, or 0.2%, to 1904.65. The Nasdaq has fallen more than 4% since setting a 22-month high on Dec. 1.

Volume on the New York Stock Exchange was 1.41 billion shares, while 1.94 billion shares changed hands on the Nasdaq. Decliners beat advancers on the NYSE by about 3 to 2 and by close to 2 to 1 on the Nasdaq.

"The S&P tested the 1058 level about four times, and held up pretty well," said Ray Hawkins, vice president of block trading at J.P. Morgan. "But when it couldn't break through, a lot of programmed selling kicked in."

"People had to decipher the news a little bit better, as far as the language the Fed used," said Michael O'Hare, head of block trading at Lehman Brothers. "But the market still has a lot of positive components: The S&P is in striking distance of 1100, the Dow is close to 10,000 and the Nasdaq is just below 2000. In addition, growth is good, and productivity remains strong."

On Tuesday the Federal Reserve left interest rates at a 45-year low of 1%, and once again said rates could remain low for a "considerable period." But the Fed may have signaled a significant, though subtle, change in policy by saying the risk of falling inflation had diminished.

At the same time, the Nasdaq Composite posted its worst loss in six weeks, and the

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backed away from 10,000 after momentarily breaching it.

The January Effect

For the first time in several years, investors are faced with a problem that they would be happy to deal with every year: finding stocks that have been dogs, which can then be sold to offset significant capital gains from winning issues. However, the search could be difficult, because "for every 20 stocks in an investor's portfolio, there are likely to be 15 winners," said Art Hogan, chief market analyst at Jefferies.

But Robert Pavlik, portfolio manager at OakTree Asset Management, feels that this could become a significant issue for the market approaching the end of the year and the tax season. He expects many investors, particularly professional portfolio managers, to focus on tax-loss selling to offset capital gains.

Ken Tower, chief market strategist at CyberTrader, believes this process is already underway, and contributed to yesterday's steep decline following the FOMC meeting. In a note to clients, he said, "the combination of the two round numbers

Dow 10,000 and Nasdaq 2000 and year-end tax selling overwhelmed the bulls again yesterday afternoon."

One stock that Pavlik believes could feel the pinch is


(MRK) - Get Merck & Co., Inc. Report

, which has been stung nearly 20% on the year, following several significant research disappoints. Pavlik still likes the stock over the long term, but feels that the January effect could extend losses for shareholders.

However, Hogan does not believe the January effect will be that large, because this year's rally has been particularly broad-based and there are not many dogs to be found. Nonetheless, he expects investors to "dig down deep to find losers to jettison."

Other Markets

Markets overseas finished mostly down. In London, the FTSE 100 fell 1% at 4335, and Germany's Xetra DAX dipped 0.7% to 3821. In Asia, the Hang Seng rose fractionally to 12,398 and Japan's Nikkei slumped 2.1% to 9915.6.

The dollar was slightly stronger against both the Japanese yen and the euro. Currently, one euro is trading at $1.2223, near an all-time high vs. the dollar.

The 10-year Treasury note rose 8/32, its yield falling to 4.32%, recovering nicely following yesterday's sharp decline after the Fed said the risk of disinflation was equal to that of inflation.


Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report

said Wednesday that fourth-quarter earnings were $1.19 a share, beating analysts' estimates for a profit of $1.14 a share, on a 28% rise in revenue. The company's shares lost $1.58, or 4%, to $37.87.



said it expects earnings of 30 cents to 32 cents a share in the current quarter, compared with analysts' estimates of 31 cents. For its fiscal year ending in September, the Bermuda-based conglomerate expects to make $1.42 to $1.52 a share, excluding "any impact from previously announced restructuring and divestiture programs." The Thomson First Call consensus estimate is for $1.49 a share. Tyco shares gained 33 cents, or 1.4%, to $24.32.

Homebuilders came under pressure again in the wake of

Washington Mutual's

(WM) - Get Waste Management, Inc. Report

announcement Tuesday that its mortgage origination volume fell by 50% from the third to fourth quarters. The Amex homebuilders index was down 5.1% on the day, and WaMu shares lost another $1.40, or 3.5%, to $38.57.

UTI Worldwide


said it earned 42 cents a share in its third quarter, ahead of analysts' consensus of 39 cents a share. Sales jumped 24%, and the shares rallied 48 cents, or 1.3%, to $37.62.


(AZO) - Get AutoZone, Inc. Report

was downgraded at U.S. Bancorp Piper Jaffray to market perform from strong buy. The shares plunged $11.09, or 12.1%, to $80.25.

Tomorrow, there is a slew of economic releases scheduled. Among the highlights, initial jobless claims for the week ended Dec. 6 are expected to fall by 6,000 to 350,000, and make it 10 straight weeks under the key 400,000 level thought necessary for labor market improvement.

In addition, retail sales are expected to rise by 0.7% in November, after falling by 0.3% in October. Import and export prices for November will also be released, after last month's 0.1% decline and 0.1% increase, respectively.