NEW YORK (CNNfn) - U.S. stocks were mixed Tuesday as investors and traders were unwilling to place significant bets on the first day of the Federal Reserve's meeting on interest rates.
Selling dominated the trading action for the first half of the session after brokerage Merrill Lynch issued a profit warning. Technology stocks weren't far behind on the negative news train after Goldman Sachs lowered estimates on 39 firms in the sector.
The major indexes bounced off their lows of the day around midday as traders went bottom-fishing and covered short positions.
The midday buying momentum ran out of steam on the Dow Jones industrial average in the last hour of trading, but the Nasdaq composite held onto its gains.
"There was an attempt to seduce some of these fence-sitters off the sidelines and it just didn't work," said Charles Payne, president of Wall Street Strategies.
The Dow Jones industrial average fell 31.74 points to 10,472.48; it was down as much as 109 points earlier in the session. The Nasdaq composite index added 13.75 points to 2,064.62, coming back from a 33-point drop. The S&P 500 slipped 1.84 to 1,216.76.
While the Dow fell for the third straight session, analysts were encouraged by the overall resiliency in the marketplace.
"What was great was the market didn't capitulate – it didn't fall apart," said Payne. "The risk-reward is there to go in and start to nibble a little bit. But there are so many undecideds out there that it will be hard to lure them off the sidelines – especially ahead of the Fed report."
With negative corporate guidance still weighing on sentiment, it was traders, not investors, taking on most of the action. Still, analysts saw no reason for panic.
"I don't think we're in for Armageddon, but there's not going to be any visibility on earnings. So we've got months of trading fun and investors can go to the beach," said Bill Meehan, chief market analyst with Cantor Fitzgerald.
While the Fed is expected to cut interest rates for the sixth time this year, there is wide speculation about the size of the cut once policy makers conclude their two-day meeting Wednesday.
"The big surprise tomorrow (Wednesday) would be if they do nothing, but it's not going to make a matter of difference here in terms of your investment goals," Joe Cangemi, NYSE trader with Francis P. Maglio & Co., told CNNfn's Market Call.
And SG Cowen's head of NYSE trading Ken Sheinberg agreed. "Everybody knows they're going to cut. It's just a matter of who has more conviction – the bulls or the bears."
More stocks rose than fell. Nasdaq winners topped losers 2,047 to 1,708 as 1.67 billion shares traded. Advancing issues on the New York Stock Exchange topped declining ones 1,782 to 1,299 as 1.19 billion shares traded.
In other stock markets, weakness in bank and technology stocks caused London's FTSE-100 to close at a 12-week low. Asian stocks finished mixed.
Treasury securities fell. The dollar slipped against the euro but was flat versus the yen.
Sentiment still skittish
Investors have continually sought safe havens to help get through the near-term onslaught of bad news. But these havens are dwindling quickly and have prompted investors to sit on the sidelines instead.
Merrill Lynch (MER: down $7.54 to $58.91, Research, Estimates) warned that current market conditions will cut into second-quarter revenue and profit, particularly in equity and debt trading.
Analysts already had expected a 6 percent decline in revenue. But the new guidance, which put second-quarter revenue at about $5.4 billion, was well below the $6 billion forecast from First Call.
Salomon Smith Barney cut its rating on the brokerage firm to "neutral" from "buy."
"A lot of people have been flocking to financials in expectation of further Fed rate cuts," Meehan said. "The fact is that financial companies aren't going to be able to generate the type of revenue and earnings growth that analysts have been expecting."
Other financial stocks that fell in sympathy with Merrill's warning included American Express (AXP: down $0.88 to $39.00, Research, Estimates), J.P. Morgan Chase (JPM: down $1.14 to $44.68, Research, Estimates), and Lehman Brothers (LEH: down $0.70 to $76.15, Research, Estimates).
While financial stocks took the Dow sharply lower in the first hours of trading, Home Depot (HD: down $1.85 to $47.15, Research, Estimates) fell for a second day. Philip Morris (MO: down $1.25 to $46.92, Research, Estimates) and Merck (MRK: down $1.28 to $66.22, Research, Estimates) also sagged.
But Procter & Gamble (PG: up $1.06 to $63.86, Research, Estimates) bucked the trend and helped temper the Dow's losses.
Goldman Sachs lowered its earnings and revenue estimates for 39 technology companies, including Microsoft (MSFT: up $1.29 to $70.14, Research, Estimates), Siebel Systems (SEBL: up $2.38 to $42.44, Research, Estimates), Hewlett-Packard (HWP: down $0.35 to $26.51, Research, Estimates), EMC (EMC: down $0.05 to $28.30, Research, Estimates), IBM (IBM: up $0.39 to $113.04, Research, Estimates), and Broadvision (BVSN: up $0.03 to $4.71, Research, Estimates).
In a research note, Goldman's tech group cited a softness in European demand, a slowdown in Japanese tech spending and a stronger dollar.
"As always, guidance going forward will be more important than reported results. We think comments about future business will be generally subdued," the analysts wrote.
Applied Micro Circuits (AMCC: up $0.53 to $14.73, Research, Estimates) warned Monday that fiscal first-quarter financial results will fall short of previous expectations, with weak demand blamed by the communications chip specialist for the shortfall.
Outside technology and financials, diversified manufacturer Eaton (ETN: up $0.53 to $71.46, Research, Estimates) warned that its second-quarter and full-year earnings per share will be below expectations. The company, whose products include auto parts, fluid power systems and electrical power equipment, said it will earn 20-to-30 percent less than the consensus $1.21 a share forecast for the current period.
Phelps Dodge (PD: up $0.94 to $39.95, Research, Estimates), the world's second-largest copper producer, warned its second-quarter financial results will fall short of expectations due to weak copper prices. The company now expects to post a loss of $1.28-to-$1.38 a share.
International Paper (IP: up $0.10 to $35.50, Research, Estimates) said Monday it will eliminate 3,000 jobs, or 10 percent of its domestic work force, as part of an effort to reduce costs, and better align its resources with the company's core businesses of paper, packaging and forest products.
Keeping an eye on the economy
While economists agree that the Fed will cut interest rates, they're split about whether the cut will be a quarter-percentage point or a half point.
"If they (the Fed) had any plan whatsoever, they wouldn't be trying to micro manage the economy and target the stock market like they have been," Meehan said.
Aside from the actual interest rate decision, market participants will keenly tune into the Fed's accompanying statement for signs of how the central bank is viewing the state of the economy.
"They're still very much concerned that the risk in the economy of a downturn is much greater than it is of inflation," David Horner, senior financial strategist with Merrill Lynch, told CNNfn's Before Hours. "I suspect they will restate that risk. However, they will probably indicate that the increments of easing from here on out are going to be smaller because there's an awful lot of easing in the pipeline."
The Fed's rate cuts have been made in an effort to stave off recession but it generally takes six-to-12 months to work through the economy.
"I don't think we're in bad shape. I think we're in a recession," Michael Holland, chairman of Holland & Co., told CNNfn's Market Call. "I think we're in very good shape to weather this recession and make it a short, shallow one."
In the day's economic news, consumer confidence soared in the United States in June, while new home sales surged in May, according to separate reports that showed signs of surprising strength in the world's largest economy.
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Columnist Michael Sivy looks into why the Federal Reserve's interest rate cuts don't seem to be helping stocks much.
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In a third report, demand for cars, computers and other durable goods rose 2.9 percent in the United States in May after falling a revised 5.5 percent in April, according to the government. 
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