Market rally is short-lived

NEW YORK (CNNMoney.com) -- Stocks gave up early gains Tuesday, as pessimism about major financial stocks continued to plague the market and the mortgage-lending sector tanked.

Earlier in the day the markets had rallied on strength in Hewlett-Packard's results (Charts, Fortune 500) reported Monday and the perception that a Fed rate cut might be more likely because of recent economic weakness.

But the Dow Jones industrial average (Charts) eased 0.2 percent with about two hours left in the session Tuesday, while the S&P 500 (Charts) index had fallen 0.2 percent. The Nasdaq composite (Charts) had declined 0.4 percent.

Stocks tumbled Monday, with the Dow falling below 13,000 for only the second time since August, as Goldman Sachs' (Charts, Fortune 500) dour outlook on the financial sector and a weak report on homebuilder confidence sparked a broad market selloff.

On Tuesday bad news from mortgage backers Freddie Mac and Fannie Mae dragged the mortgage sector - and the broader markets - down.

Tuesday morning, Freddie Mac (Charts, Fortune 500) reported a steep quarterly loss and said it had set aside $1.2 billion in the quarter to account for credit losses. Shares fell over 30 percent.

Fellow government-sponsored mortgage backer Fannie Mae (Charts) slumped 25 percent. The company has been under pressure over the past few weeks after it revealed its mortgage losses, with investors questioning whether the losses are bigger than the company has so far acknowledged.

Stocks had bounced early on Tuesday, aided by the HP news and speculation that the Federal Reserve would cut interest rates again at the Dec. 11 meeting, or even ahead of it.

"Partially, I think we were just reaching some unsustainable levels of negative sentiment and we were very much due for a bounce," said John Wilson, chief technical strategist at Morgan Wilson. "A little good news this morning helped."

He said that the combination of H-P and hopes that the Fed will cut again constituted that good news.

Hewlett-Packard (Charts, Fortune 500) reported quarterly sales and revenue that topped expectations late Monday, sending shares modestly higher Tuesday morning.

Dow component Exxon Mobil (Charts, Fortune 500) jumped on a UBS upgrade, Briefing.com reported.

It was one of many Dow stocks bouncing back after Monday's retreat. Other gainers included Alcoa (Charts, Fortune 500), IBM (Charts, Fortune 500) and Microsoft (Charts, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, losers beat winners two to one on volume of 900 million shares. On the Nasdaq, decliners led advancers two to one on volume of 1.3 billion shares.

Fed funds futures show Wall Street is betting the central bank will cut rates by at least a quarter-percentage point at the Dec. meeting. But as tends to happen following a sustained period of bad news, there may also have been some speculation that the Fed could step in early.

But an emergency meeting "would be highly unlikely," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. "Anytime you have a really bad day, like yesterday, or something like with Freddie Mac this morning, you hear these rumors."

The minutes from the last Fed meeting are due for release this afternoon and should help provide clarity on how the Fed saw the economic outlook at the last meeting. In addition, the minutes should include forecasts for the economy.

In morning economic news, October housing starts rose more than expected, while permits, a measure of builder confidence, fell more than expected.

Treasury prices fell, giving up earlier gains, raising the yield on the 10-year note to 4.11 percent from 4.07 percent late Monday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar gained versus the yen and fell against the euro.

U.S. light crude oil for January delivery jumped $2.86 to $97.50 a barrel on the New York Mercantile Exchange, after having been on both sides of unchanged through the morning.

COMEX gold for December delivery rose $16.50 to $794.50 an ounce.