Stocks struggle ahead of Fed

ROAD TO RESCUE

• Home prices up for 1st time in 3 years
• New home sales: 'Really good news'
• Wall Street: Here comes the hard part
• 7 regional banks fail
• Banker: "TARP helped avert a global calamity"

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NEW YORK (CNNMoney.com) -- Stocks struggled Tuesday, with the Dow touching a fresh three-week low, as investors eyed a weaker-than-expected housing market report and geared up for the latest from the Federal Reserve.

The Dow Jones industrial average (INDU) fell 16 points or 0.2%. The S&P 500 (SPX) added 2 points, or 0.2% and the Nasdaq (COMP) ended just below unchanged.

After rallying 40% in 14 weeks, stocks, as represented by the S&P 500, have lost around 6% in just over a week. Bets that an economic recovery is brewing fueled the advance. But those bets turned to worries that the recession will drag on and the market has gotten ahead of itself.

"We went from economic news that was pretty dire to news that was just less dire," said Matt King, chief investment officer at Bell Investment Advisors. "But the news never turned positive."

"For the rally to keep going we need to start getting some good news," he said. "Yesterday's outlook from the World Bank certainly didn't help."

Stocks sank to three-week lows Monday after the World Bank's dour outlook on global growth and a selloff in commodities spooked investors.

Wednesday brings a slew of economic news. The May durable goods orders report is due before the start of trading. The May new home sales report is due out after the start of trading.

In Washington, the House Financial Services Committee holds a hearing on regulatory restructuring starting at 10:00 a.m. ET.

The weekly crude oil supply report from the Energy Information Administration is due at around 10:30 a.m. ET.

And the Fed will make an announcement about interest-rate policy around 2:15 p.m. ET.

Housing: Existing home sales rose 2.4% to a 4.77 million unit annualized rate in May from a 4.66 million unit annualized rate in April. That was short of forecasts for a rise to 4.82 million units, according to economists surveyed by Briefing.com. The median home price fell 16.8% year over year.

A Labor Department report said mass layoffs -- or layoffs affecting 50 people or more -- rose last month to tie a multi-year record hit in March, as the job market continued to struggle.

The Federal Reserve began its two-day policy meeting Tuesday with an announcement expected Wednesday afternoon. The central bank is expected to hold interest rates steady at historic lows near zero. However, what the bankers say about the economy, the bond market and the outlook for inflation will be critical.

Company news: Boeing said it has again delayed the initial test flight of its new 787 jet because it needs to reinforce part of the aircraft. The flight had initially been planned for late 2007, but got postponed because of production problems and a labor strike.

Boeing (BA, Fortune 500) shares fell 6.5% and dragged on the Dow.

United Technologies (UTX, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500) were the Dow's other big drags.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by a narrow margin on volume of 1.21 billion shares. On the Nasdaq, decliners topped advancers three to two on volume of 2.19 billion shares.

U.S. still tops: Ratings agency Moody's said that the U.S. government's credit rating was still triple-A but that it could be at risk if Washington can't start bringing its debt down.

Bonds: Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.63% from 3.68% Monday. Treasury prices and yields move in opposite directions.

The bond market showed little reaction after positive results from a $40 billion two-year Treasury auction. The auction showed strong demand, a positive as the government looks to raise funds to pay for its bailout and stimulus programs.

Other markets: U.S. light crude oil for August delivery rose $1.74 to settle at $69.24 a barrel on the New York Mercantile Exchange.

COMEX gold for August delivery rose $3.30 to settle at $924.30 an ounce.

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

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