Stocks resurface in a choppy session

NEW YORK (CNNMoney.com) -- Stocks inched higher Wednesday afternoon, as looming downgrades for bond insurers highlighted credit concerns and results from the Fed's $20 billion auction made for a volatile session.

The Dow Jones (INDU) industrial average gained 0.2 percent with 90 minuets left in the session. The broader S&P 500 (INX) index gained 0.2 percent. The tech-fueled Nasdaq (INX) composite gained 0.4 percent.

In a troubling sign of more credit market turmoil, bond insurer ACA Financial Guaranty Corp. saw its "A" credit rating cut down Wednesday to non-investment grade "CCC" by Standard & Poor's. Bond insurers, which guarantee bonds and other structured investments that have recently plunged in value, have been buffeted by the credit crunch.

Other bond insurers, including Ambac Financial Guaranty Insurance Co., (ABK) MBIA Insurance Corp (MBI). and XL Capital Assurance Inc (XL)., were also dragged down by the news.

Adding to the volatility, stock index futures and options and individual stock futures and options will all expire simultaneously this Friday.

Peter Cardillo, chief market economist at Avalon Partners, points out that "the markets are very much caught in an options expiration week."

"When you have a weak market heading into an options expiration week, you will see selling during that week," he added.

Investors also reacted to the results of the Fed's $20 billion auction launched on Monday. The first of four auctions showed strong demand, as the central bank loaned $20 billion at 4.65 percent. That was slightly below the discount rate of 4.75 percent.

But the Fed's action may not be enough to keep spirits bright on Wall Street, according to Harry Clark of Clark Capital Management Group.

"The Santa Claus rally is non-existent," he said. And the absence of the traditional year-end rally means "we could be headed for a recession next year."

"We may look back and realize that the market topped out in October," Clark said.

In the latest woes for the banking sector, Morgan Stanley (MS, Fortune 500) posted a bigger-than-expected quarterly loss Wednesday morning and said it would take an additional $5.7 billion in writedowns on top of the $3.7 billion it had already announced, due to the subprime mortgage mess.

However, investors sent Morgan shares higher, along with other major banks including Lehman Brothers (LEH, Fortune 500) and JP Morgan (JPM, Fortune 500).

Shares of Sallie Mae (SLM, Fortune 500) were down nearly 20 percent as the lender's CEO hinted in a shareholder conference call that a dividend cut may be necessary to soften the blow of rising loan defaults.

Among other movers, homebuilder Hovnanian (HOV, Fortune 500) plunged 14 percent after reporting a quarterly loss late Tuesday that more than quadrupled from a year ago.

And in the latest bad news for the housing sector, the level of foreclosures was up 68 percent in November from a year ago, according to tracking service RealtyTrac. On the upside, foreclosures fell 10 percent from the previous month.

In other news, shares of smart phone maker Palm (PALM) fell more than 7 percent after the company reported a loss and warned that revenue for the quarter would be lower than expected.

On the Nasdaq, shares of software maker Oracle Corp (ORCL, Fortune 500) fell more than 2 percent ahead of the company's earnings report due out later Wednesday.

Market breadth was mixed. On the New York Stock Exchange, losers topped winners seven to eight on volume of 969 million shares. On the Nasdaq, advancers beat decliners by a narrow margin on volume of 1.41 billion shares.

Treasury prices rose, lowering the yield on the 10-year note to 4.07 percent from 4.14 percent late Tuesday. Treasury prices and yields move in opposite directions.

U.S. light crude oil for January delivery rose $1.32 cents to $91.40 on the New York Mercantile Exchange after the government's weekly report showed lower than expected crude supplies.

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

COMEX gold for February delivery fell $2.00 to $805.40 an ounce.