Stocks trip again

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NEW YORK (CNNMoney.com) -- Stocks slipped Wednesday afternoon, resuming the recent selloff, after more problems for the mortgage lenders and other financial companies exacerbated worries about the threat of a recession.

The Dow Jones industrial average (INDU) lost 0.5 percent with under 2 hours left in the session. The broader S&P 500 (INX) index lost 0.6 percent. The Nasdaq (COMPX) composite lost around 1 percent.

Stocks had rebounded in the morning, following Tuesday's big slump, after DuPont lifted its earnings outlook for 2007 and 2008. But the gains were flimsy, with broader concerns about the economy countering the corporate news.

By the afternoon, stocks had turned lower again, due in part to the problems in the financial sector.

As of Tuesday's close, the S&P 500 has lost about 5.3 percent year-to-date, while the Dow industrials has fallen 5.1 percent and the Nasdaq composite has fallen 8 percent.

"It's been a bad start to the year," said Greg Church, president at Church Capital.

"I think we're getting to the point where we're way oversold and you could see a bounce," Church said. "But not when the financials continue to be this weak, because the market is taking its cue from the financial sector."

Church said that the Federal Reserve is going to need to step in and take some action, perhaps even sooner than the next policy meeting at the end of the month, a move others on Wall Street are calling for. (Full story).

The financial sector led the downturn Wednesday.

MBIA (MBI) said it will cut its dividend and raise $1 billion from the sale of notes, as a means of raising money and avoiding a ratings downgrade. The bond insurer also said that regulators have probed how thoroughly it disclosed risks, and that regulators are now looking at the $1 billion investment it received in December from Warburg Pincus. Shares fell 13 percent.

Countrywide Financial (CFC, Fortune 500) slumped for a second session after the mortgage lender said that the delinquency and foreclosure rate of home loans in its portfolio jumped in December. Shares slumped 11 percent and dragged on Washington Mutual (WM, Fortune 500).

A variety of big bank stocks fell, including JP Morgan (JPM, Fortune 500), Citigroup (C, Fortune 500), Morgan Stanley (MS, Fortune 500) and Lehman Brothers (LEH, Fortune 500).

One of the few financial sector gainers was E*Trade Financial (ETFC), which gained 2 percent. The company said it sold $3 billion in mortgage-backed securities and municipal bonds and that it is getting out of its institutional trading business as it attempts to accelerate its turnaround effort.

On the upside, chemical maker DuPont (DD, Fortune 500) said that it will post stronger-than-expected earnings in the fourth-quarter 2007 and full-year 2007, as well as full-year 2008, despite the slowing economy. That sent shares of the Dow component up almost 6 percent.

But DuPont was one of few bright spots, as investors continued to worry about the outlook for the economy.

Alcoa shares slid ahead of its quarterly earnings report, due out after the close.

Meanwhile, a variety of big tech stocks fell, including Yahoo! (YHOO, Fortune 500), eBay (EBAY, Fortune 500) and Advanced Micro Devices (AMD, Fortune 500).

Market breadth was negative. On the New York Stock Exchange, losers topped winners 2 to 1 on volume of 1.15 billion shares. On the Nasdaq, decliners topped advancers three to one on volume of 1.73 billion shares.

Investment bank Goldman Sachs added to the growing talk of a pronounced slowdown, saying that recent data suggest the economy is falling into a recession.

Goldman Sachs said that as a result of this slowdown, the Federal Reserve is likely to cut the fed funds rate, a key short-term lending rate, to 2.5 percent by late 2008. The fed funds rate currently stands at 4.25 percent after the Fed cut it three times in a row.

St. Louis Fed President William Poole said that fundamentals remain strong and that it is too early to tell if the problems in the housing market will push the economy into recession, Briefing.com reported. Poole was a voting member of the Fed's policy committee in 2007.

Fed Chairman Ben Bernanke is due to speak Thursday afternoon in Washington, D.C., on the economic outlook and monetary policy.

Stocks tumbled Tuesday, extending the abysmal start to the new year, on speculation that Countrywide Financial could file for bankruptcy and a warning from AT&T that it's consumer business is suffering. The corporate news played into growing worries that the economy could be headed for a recession amid the credit and housing market fallout.

Overall, the three major gauges have now fallen at least 10 percent off the recent highs hit in October on a closing level - the technical definition of a market correction. That can spark a big rally, as in November, with people using the selloff as an opportunity to jump back in at lower levels. Or a correction can lead to more selling and eventually a bear market, defined as a drop of 20 percent off the highs.

Treasury prices slumped, raising the corresponding yields on the 10-year note to 3.81 percent from 3.77 percent late Tuesday. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for February delivery rose 99 cents to $97.32 a barrel on the New York Mercantile Exchange Tuesday, following a mixed oil inventories report.

COMEX gold for February delivery rose 20 cents to $880.50 an ounce, nearing record highs hit on Tuesday.