With Halloween still nearly three weeks away, investors weren't sure whether to try on their bull or their bear suit Tuesday. But the bearish costume was clearly more in favor by the close of trading, as inflation jitters caught up with the market, sending major stock proxies sharply lower.

Bulls briefly had the upper hand in morning trade, amid hope that earnings will provide a catalyst to sustain the bounce from five-month lows seen over the past two sessions.

These hopes may be validated Wednesday, as earnings from key tech leaders Motorola ( MOT) and Yahoo! ( YHOO) seemed to please investors after the close of trading.

Intel ( INTC), however, produced mixed results and lackluster sales guidance.

If there's any hope to be had for tech bulls, it might be that the Nasdaq Composite, while it fell 0.7% to 2056, did not lead the market lower Tuesday.

Instead, it was the S&P 500, weighed down by energy shares and homebuilding stocks, that led the downside. The broad index dropped 1% to 1178.14, finishing at its low of the session.

The energy sector fell along with the price of crude oil, which dropped $1.16 to $63.20 as Tropical Storm Wilma seemed to veer away from sensitive areas in the Gulf of Mexico. The Amex Oil Index lost 4% while the Philadelphia Stock Exchange Homebuilding Index fell 3.2%. Housing sector stocks were hurt by American Standard's ( ASD) disappointing results and some cautious comments by NVR ( NVR).

Meanwhile, the Dow Jones Industrial Average finished down 67.84 points, or 0.61%, at 10,285.26, its session low and well off an intraday high of 10,285.26.

The blue-chip average had received early support after decent earnings from the likes of IBM ( IBM), Johnson & Johnson ( JNJ), and 3M ( MMM).

But those gains weren't enough to offset losses elsewhere, including a 4% decline in the shares of Exxon Mobil ( XOM).

Tuesday's action seemed to undo a lot of the goodwill -- and optimistic sentiment -- generated by the advance of the past two trading days, as reflected in market internals. Declining stocks led advancers 23 to 9 in Big Board trading where down volume was nearly 80% of the 2.2 billion-share total. Losers led 20 to 9 in over-the-counter trading where down volume was 67% of the 1.5 billion total.

As has often been the case, bulls were too quick to declare a bottom after the two-day advance, according to Chris Johnson, market strategist at Schaeffer Research. The ratio of put to call options has been "flattish" since Monday, indicating that "people didn't want to buy or sell ahead of earnings," he says. "This a noncommittal market."

With key tech leaders reporting Tuesday night and more over the next few days, the confidence of market players is being tested. "We're at a crossroads and our back is up against the wall," says Johnson.

The hefty drops in the major stock averages since early October have provided "potentially very strong support," but they also have shaken investor optimism, especially as inflation fears persist, Johnson says.

Enthusiasm had been tempered before the open of trading by news that producer prices had soared in September. And lest investors forget what fighting inflation means, San Francisco Fed President Janet Yellen for the first time gave an indication of just how high the central bank might be considering lifting short-term rates.

Elaborating on the elusive concept of when the fed funds rate, currently at 3.75%, would reach the elusive neutral level, which doesn't stimulate nor hinder economic growth, Yellen put that level at anywhere between 3.5% to 5.5%. With the fed funds rate currently at the lower end of that range, "this suggests a presumption that the rate will need to be raised further," Yellen said in a speech.

In spite of the negative inflation news, bond prices held on to modest gains Tuesday after morning news that foreign buying of U.S. Treasuries had increased in August. The benchmark 10-year Treasury bond finished up 3/32 while its yield, which moves inversely, fell to 4.48%.

There was also relief that a speech by Fed Chairman Alan Greenspan overnight didn't add fuel to the fire of inflation concerns.

On the contrary, Greenspan, who was delivering a speech to a business association in Tokyo, highlighted that soaring energy prices present a risk for global growth.

"Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on," he said.

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.

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