Wall Street: After the rally, a retreat

Edward Sweeney of Lehman Brothers Market Makers looks at an overhead monitor on the floor of the New York Stock Exchange, Friday, Feb. 1, 2008.

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NEW YORK (CNNMoney.com) -- Stocks slumped Monday afternoon, following last week's big rally, as investors mulled analyst downgrades of the financial sector and the continued threat of a recession.

The Dow Jones industrial average (INDU), the broader Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all tumbled, according to early tallies.

Treasury prices slumped, raising the corresponding yields. The dollar was mixed versus other major currencies.

Stocks rallied at the end of last week, after a miserable January, as investors welcomed Microsoft's bid for Yahoo and more talk of a bailout for the troubled bond insurers.

Last week the Dow gained 4.4% and the S&P 500 jumped 4.9%. The Nasdaq advanced 3.8%.

After such a big run, stocks were vulnerable Monday. Investors are trying to figure out if the market has put in a 'bottom' after the recent selloff or if last week's advance was just a temporary respite from all the selling.

"We saw a pretty decisive move upward on good volume, but the financial condition of the economy is still perilous," said Robert Philips, president and chief investment officer at Walnut Asset Management.

He said that the outlook for stocks over the next few months is going to depend on whether the market has actually bottomed out and also whether the bond insurers get some relief. The latest leg of the credit crisis has surrounded the solvency of insurers MBIA (MBI) and Ambac Financial (ABK).

In economic news, the December factory orders index rose more than expected. Orders rose 2.3%, the government reported, topping forecasts for a rise of 2%. Orders rose 1.7% in November.

However, the report did little to alleviate concerns about the economic slowdown, following Friday's surprisingly weak Jan. jobs report.

Company news. UBS downgraded American Express (AXP, Fortune 500) to "sell" from "buy." The bank also cut its ratings on Discovery Financial (DFS) and Capital One Financial (COF, Fortune 500) to "sell" from "hold."

The downgrades reflected the firm's forecast for a consumer-led recession in the first six months of this year, which would weigh on the credit card issuers.

Additionally Merrill Lynch downgraded Wachovia (WB, Fortune 500) and Wells Fargo (WFC, Fortune 500) to "sell," Briefing.com reported. Stifel Nicolaus also downgraded Wells Fargo.

Washington Mutual (WM, Fortune 500) and Countrywide Financial (CFC, Fortune 500) both dropped as well.

Microsoft (MSFT, Fortune 500)'s proposed $45 billion takeover of Yahoo (YHOO, Fortune 500) remains in the spotlight and is facing challenges from Google (GOOG, Fortune 500).

Google publicly criticized the unsolicited bid over the weekend, and the company's chief executive called Yahoo's CEO to offer help in fending off Microsoft, possibly through a partnership, according to published reports. On Monday, Microsoft's CEO continued to talk up the deal, saying it would make his company a strong No. 2 competitor to Google.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by three to two on volume of 1.36 billion shares. On the Nasdaq, decliners beat advancers four to three on volume of 2.06 billion shares.

Worried about a recession. Stocks tumbled in January, with the Nasdaq losing nearly 10% for its worst start to the year ever. Investors have been bailing out of a variety of sectors on bets that the credit and housing market fallout has sent the economy into a recession, or will do so later this year.

The Federal Reserve has cut short-term borrowing rates twice in the last two weeks as a means of shoring up the economy and loosening up the credit market.

A nearly $150 billion fiscal stimulus plan that would give tax breaks to many consumers is being debated in the Senate after receiving approval in the House of Representatives.

On Monday, President Bush announced a $3.1 trillion budget that includes more military spending and the fiscal stimulus plan.

Other markets. Treasury prices fell, raising the yield on the benchmark 10-year note to 3.65% from 3.58% late Friday. Bond 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 March delivery rose $1.06 to settle at $90.02 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $4.10 to $909.40 an ounce.