Stocks give up gains

NEW YORK (CNNMoney.com) -- Stocks stalled Wednesday afternoon, after edging higher in morning trade, as investors mulled the outcome of the Fed's $20 billion auction and a bigger-than-expected writedown by Morgan Stanley.

The Dow Jones (INDU) industrial average slipped 0.3 percent 2 1/2 hours into the session. The broader S&P 500 (INX) index lost 0.3 percent. The tech-fueled Nasdaq (INX) composite gave up a few points.

Stocks managed gains Tuesday after a tough session in which strong earnings from Goldman Sachs (GS, Fortune 500) were countered by ongoing worries about the credit market crisis. After a shaky start Wednesday, investors looked to continue that modest advance, despite some negative corporate news.

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 Clause 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, he added.

"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).

Among other movers, homebuilder Hovnanian (HOV, Fortune 500) plunged 9 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.

Shares of Sallie Mae (SLM, Fortune 500) were down nearly 16 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.

In other news, shares of smart phone maker Palm (PALM) fell more than 8 percent after the company reported a loss and warned that revenue for the quarter would be lower than expected.

Market breadth turned negative. On the New York Stock Exchange, losers topped winners nine to seven on volume of 556 million shares. On the Nasdaq, decliners narrowly edged advancers on volume of 808 million shares.

Treasury prices rose, lowering the yield on the 10-year note to 4.09 percent from 4.14 percent late Tuesday. Treasury prices and yields move in opposite directions.

U.S. light crude oil for January delivery rose 57 cents to $90.65 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 $2.90 to $804.50 an ounce.