Stocks ward off losses

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NEW YORK (CNNMoney.com) -- Stocks managed to cut losses by the close of a very choppy session Monday in which investors mulled commentary about the economy from President Bush, Treasury Secretary Henry Paulson and a Federal Reserve official, as well as news of an incident between Iran and the U.S. military.

The Dow Jones industrial average (INDU) added 0.2 percent. The broader S&P 500 (INX) index added 0.3 percent. The Nasdaq (COMPX) composite slid 0.2 percent.

Stocks seesawed on both sides of unchanged throughout the session, as investors sorted through the day's news and struggled to find stability after last week's big selloff.

Shortly before the close, the major gauges were down sharply, until a last-minute advance propelled the Dow and S&P 500 into positive territory and helped the Nasdaq cut losses.

"The market bounced around a lot today, and I think that's going to continue to be the case going forward, at least until the next Fed meeting," said John Forelli, portfolio manager at Independence Investments.

He said that in the next few weeks, investors will be parsing the economic news for what it says about growth, but also whether it implies the Fed is more likely to cut interest rates by a quarter-percentage or a half-percentage point at its meeting at the end of the month.

On Tuesday, Philadelphia Fed President Charles Plosser and Boston Fed president Eric Rosengren are due to speak about the economic outlook. Plosser will be a voting member of the Fed's 2008 policy-setting committee, starting with the Jan. meeting. Rosengren was a voting member in 2007.

Government and Federal Reserve officials spoke Monday on the outlook for the economy in the wake of the ongoing housing market fallout.

Treasury Secretary Henry Paulson, in a New York speech, said that while the Bush administration is working to counteract the housing crisis, there is no simple solution. He also sought to defend the Bush administration's plan to "freeze" rates on certain subprime mortgages. (Full story).

President Bush, speaking in Chicago, said that the economic signals are mixed, creating anxiety for many Americans, but that the economy is resilient and the nation has dealt with anxiety in the past. He also discussed the need for keeping taxes low.

Atlanta Fed president Dennis Lockhart said that negatives in the economy are picking up speed and market contacts are worried about further deterioration. Lockhart is not a voting member of the Fed's 2008 policy committee, but will be an alternate as of the upcoming Jan. 29-30 meeting.

Adding to stock skittishness was word from the U.S. military that five Iranian boats harassed three U.S. naval ships in international waters Sunday. Iran denied that the matter was a serious incident. The White House said it will confront such behavior if Iran threatens the United States or its allies. (Full story).

Stocks could benefit in the next few days from technical market factors. The major stock gauges have now fallen 10 percent from the October highs, in intraday trading Monday. Should stocks close 10 percent off the highs, that would be the technical definition of a "correction."

Such a development can often cause a bounce back effect, as was the case in November, the last time the major gauges corrected.

However, it's going to take more than technical factors for stocks to make a sustained move higher, said John Wilson, chief technical strategist at Morgan Keegan.

In addition to the technical factors, stock investors in the next few weeks will be responding to fourth-quarter earnings reports, which start pouring in Wednesday with Alcoa (AA, Fortune 500), and the upcoming economic news.

Wilson said last week's economic news was bad, but other news has been mixed. If that continues to be the case, "that would send the message to the recession bears that conditions are still OK, and that could help stocks recover a bit," he said.

Additionally, Wilson said that earnings expectations are so low that it wouldn't be hard for corporations to top expectations. These factors could help give stocks a push ahead of the next Federal Reserve meeting, when the central banks is expected to cut rates again.

Among stock movers, financial, technology and metal stocks led the list of decliners, while utility, oil services and transportation stocks were among the biggest winners.

Among Dow movers, Alcoa (AA, Fortune 500), Boeing (BA, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500) led the declines. Gainers included Home Depot (HD, Fortune 500), Wal-Mart Stores (WMT, Fortune 500), Altria (MO, Fortune 500), Coca-Cola (KO, Fortune 500) and AIG (AIG, Fortune 500).

Apple (AAPL, Fortune 500), Dell (DELL, Fortune 500), eBay (EBAY, Fortune 500) and Applied Materials (AMAT, Fortune 500) were among the Nasdaq's biggest decliners.

In corporate news, McDonald's is set to unveil its own coffee bars, complete with baristas, at its nearly 14,000 U.S. locations, taking on Starbucks' dominance, The Wall Street Journal reported. Shares of McDonald's (MCD, Fortune 500) gained 1.7 percent.

After the close, Starbucks (SBUX, Fortune 500) said it was replacing its CEO with its chairman and former chief executive, and closing under performing stores. Shares jumped 6 percent in extended-hours trading. (Full story).

Dow stock IBM (IBM, Fortune 500) fell after UBS downgraded the tech behemoth to "neutral" from "buy" on bets that financial services firms will slow their spending.

Best Buy (BBY, Fortune 500) shares dipped after Bear Stearns downgraded it to "underperform" from "outperform" on bets that consumer spending on discretionary purchases will slow.

Market breadth was mixed. On the New York Stock Exchange, winners beat losers nine to seven on volume of 1.71 billion shares. On the Nasdaq, decliners edged advancers by a narrow margin on volume of 2.60 billion shares.

Friday brought a brutal end to a tough first week. The major gauges tumbled, with the Nasdaq losing nearly 100 points, its worst day in more than 6 years.

The decline followed a weaker-than-expected December employment report, which revived worries that the economy could be heading into a recession.

Record oil and gold prices added to such fears, but both fell further from their all-time highs in Monday trading, helping to support a recovery.

U.S. light crude oil for February fell $2.82 to settle at $95.09 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell $3.50 to settle at $859.60 an ounce.

Treasury prices climbed, lowering the yield on the 10-year note to 3.835 percent from 3.89 percent late Thursday. Treasury prices and yields move in opposite directions.

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