Post-rally, stocks slide

NEW YORK (CNNMoney.com) -- Stocks fell Thursday, retreating after a two-day rally, as investors mulled record-high oil prices, weak earnings from Bear Stearns and a Congressional hearing on the subprime mortgage fallout.

The Dow Jones industrial average (Charts) lost almost 0.4 percent. The broader S&P 500 (Charts) index lost 0.7 percent and the tech-heavy Nasdaq composite (Charts) fell 0.5 percent.

Quick Vote

Do you support Fed policy makers' latest move on interest rates?

• It's the right move
• They should have cut rates more
• They should not have cut rates
• Not sure

or View results

The Russell 2000 (Charts) small-cap index gave up 0.9 percent.

Stocks had eased a bit through the early afternoon, but the selloff accelerated in the last hour of trading, led by home builder, financial, retail and transportation issues.

After the close, Oracle (Charts, Fortune 500) reported higher quarterly earnings and revenue that topped estimates. The business software leader also reported a large jump in sales of new software licenses, that topped forecasts. Shares rose 2 percent in extended-hours trading.

Apple (Charts, Fortune 500) CEO Steve Jobs has been subpoenaed by the Securities and Exchange Commission to give a deposition in a stock-options backdating case against the company's former general counsel, AP reported late Thursday. Apple stock was little changed in extended-hours trading.

With no meaningful earning or economic reports due Friday, the focus will be oil prices, the dollar and the bevy of Federal Reserve officials due to speak. They include Fed governors Frederic Mishkin, Kevin Warsh and Donald Kohn, all of whom are voting members of the 2007 FOMC.

Stocks surged for two sessions in a row after the Federal Reserve cut a key interest rate by a half-percentage point and hinted in its statement that it would consider more rate cuts in the future, if necessary. It was the first cut in over 4 years and served to reassure investors worried that the mortgage and credit market malaise could send the economy into recession.

But the stock run hit some resistance Thursday as investors struggled to sort through the longer-term impact of the rate cut.

Weak earnings and reports from the subprime hearing were also in the mix.

"Clearly the market was shocked by the half-point cut and that's why we rallied," said Greg Church, president of Church Capital. "But the consequences of that action could become apparent in the next few weeks and you could see the market stall."

He said that the reaction in the Treasury bond market since the cut was interesting and somewhat concerning. Treasury prices have slumped since the cut, boosting the corresponding yields, perhaps on worries that lower borrowing rates will drive up inflationary costs.

Treasury prices slipped, pushing the yield on the 10-year note to 4.70 percent from 4.53 percent late Wednesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar plunged to a new all-time low against the euro, and stood at equal value with the Canadian dollar for the first time in more than 30 years. The dollar also fell against the Japanese yen and other major currencies.

U.S. light crude oil for October delivery rose $1.39 to settle at $83.32 a barrel on the New York Mercantile Exchange, ending at an all-time high for the fourth session in a row.

However, the record price remains below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today.

COMEX gold for December delivery rallied $10.40 to $739.90 an ounce.

Federal Reserve Chairman Ben Bernanke told Congress Thursday that the credit crisis has distressed financial markets and that the central bank will take steps to help the situation, reiterating the basic message of the statement that accompanied the rate cut two days ago.

He also stressed that lawmakers should tread carefully in terms of how they plan to fix the problem, including a proposal to lift caps on Fannie Mae and Freddie Mac, a move proponents think would increase liquidity.

Both Bernanke and Treasury Secretary Henry Paulson said any such initiative should be temporary.

In corporate news, Bear Stearns (Charts, Fortune 500) reported a big drop in third-quarter profit that missed estimates, due to the impact of the subprime mortgage fallout and financial market turmoil.

Goldman Sachs (Charts, Fortune 500) also said it was challenged by the tough environment, but nonetheless posted a rise in earnings and revenue.

A variety of bank stocks slipped, giving up gains earned in the two-day rally. The Amex Securities Broker/Dealer index slumped 1.9 percent.

The S&P Home Construction (Charts) ETF lost more than 5 percent, while the Philly Housing Sector (Charts) index gave up over 4 percent.

Circuit City (Charts, Fortune 500) slumped 18 percent after reporting a quarterly loss versus a year-ago profit, a decline in sales at stores open a year or more versus a year-ago rise, and a drop in revenue from the previous year. The electronics retailer blamed lower sales and the impact of a restructuring.

FedEx (Charts, Fortune 500) warned that second-quarter and full-year earnings won't meet expectations, due to uncertainty about the economic outlook and housing market. The package delivery firm also reported higher fiscal first-quarter earnings thanks to strong international growth.

The surge in oil prices dragged on fuel-dependant railroads, airlines and truckers. The Dow Jones Transportation (Charts) average lost 1.9 percent.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by over 2 to 1 on volume of 1.27 billion shares. On the Nasdaq, decliners topped advancers by 3 to 2 on volume of 1.79 billion shares.

The morning brought several economic reports, including the Philadelphia Fed index. Released around noon, the regional read on manufacturing rose to 10.9 from a previous flat reading. Economists thought it would rise to just 2.5, on average.

An earlier report, the index of leading economic indicators (LEI), fell 0.6 percent in August, topping forecasts. LEI posted an upwardly revised gain of 0.7 percent in the previous month.

Another report showed that the number of Americans filing claims for unemployment fell last week to the lowest level in seven weeks. The drop surprised economists, who were looking for a rise in jobless claims, on average.

Investors seemed to take in stride the Philadelphia Fed index. Released around noon, the regional read on manufacturing rose to 10.9 from a previous flat reading. Wall Street economists thought it would rise to just 2.5, on average.