Stocks: right back down
Wall Street gives up nearly 75% of the previous session's rally as investors retreat. Oil and gold prices plunge. Morgan Stanley earnings, Fannie and Freddie news help, but can't stop losses.
NEW YORK (CNNMoney.com) -- Wall Street retreated Wednesday, with investors giving back a big chunk of the gains made in the previous session, with losses in financials and commodity stocks leading the way.
Slumping oil and gold prices did little to relieve inflationary worries and instead sparked a big selloff in oil services and metal and mining stocks.
The Dow Jones industrial average (INDU) lost nearly 300 points or 2.4%. The broader Standard & Poor's 500 (SPX) index lost 2.4%. The Nasdaq composite (COMP) lost 2.6%. All three stock indexes had been on both sides of unchanged throughout the morning.
Stocks rallied Tuesday, with the Dow climbing 420 points, its biggest one-day point gain in 5-1/2 years after the Federal Reserve announced a steep cut to short-term interest rates.
But stocks slumped Wednesday after investors tried to push stocks higher in the morning on better-than-expected earnings from Morgan Stanley and news that regulators will let Fannie Mae and Freddie Mac buy more home loans.
"This is standard profit taking after a rally," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. He said that although the Fed news from the previous session and the financial news from Wednesday's session were positive, credit crisis fears remain.
Thursday is a big day, Rovelli said, because of the impact of the options expiration, a quarterly event in which stock index futures and options, and individual stock futures and options, are all expiring at the same time. This can lead to increased volatility in the underlying stocks and could also speak to the increased volatility Wall Street has seen this week.
The expiration day usually occurs on a Friday but is happening Thursday because all financial markets are closed the following day for Good Friday.
The options expiration could brings in some "serious short covering," said Peter Cardillo, chief market economist at Avalon Partners.
Short-covering refers to a process by which traders who have sold stock short to take advantage of a falling market have to buy it back.
Financial sector. Morgan Stanley (MS, Fortune 500) reported lower quarterly sales and earnings due partly to a big writedown related to bad mortgage bets. However, results topped estimates, echoing Tuesday's news from Lehman Brothers and Goldman Sachs. Morgan Stanley shares gained 4.5%.
Visa (V) rallied on its first day of trading Wednesday after the credit card issuer's initial public offering priced for a record-breaking $17.9 billion Tuesday night. (Full story).
Shares of Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) rallied on reports that the government is loosening restraints on the lenders that will allow them to provide as much as $200 billion more in funding for home loans. Both stocks jumped. (Full story).
JP Morgan Chase (JPM, Fortune 500) was little changed. The Wall Street firm said earlier this week that it was buying Bear Stearns for fire sale prices. Bear Stearns shares slipped Wednesday.
Lehman Brothers (LEH, Fortune 500) and Goldman Sachs (GS, Fortune 500) were among the other financial sector decliners.
Merrill Lynch (MER, Fortune 500) slipped after reports said it was suing XL Capital, a Security Capital Assurance unit (SCA), to make sure the company doesn't default on up to $3 billion in loans.
Among other stock movers, oil services stocks including Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500) fell in tandem with oil prices.
Gold stocks fell, along with the commodity, dragging the Amex Gold Bugs (HUI) index down nearly 7%.
Intel (INTC, Fortune 500), Cisco Systems (CSCO, Fortune 500), Applied Materials (AMAT, Fortune 500), Dell (DELL, Fortune 500) and Qualcomm (QCOM, Fortune 500) were among the big technology shares sliding.
Market breadth was negative. On the New York Stock Exchange, losers beat winners 2 to 1 on volume of 1.97 billion shares. On the Nasdaq, decliners topped advancers 2 to 1 on volume of 2.32 billion shares.
Eye on the Fed. On Tuesday, the central bank cut the fed funds rate, a key short-term lending rate that impacts consumer loans, by three-quarters of a percentage point, to 2.25%, missing bets for a cut of a full percentage point.
Stocks initially retreated, but then rallied soundly through the close as investors bet the smaller cut means the Fed is actively dealing with the financial market fallout, but isn't so worried that it needs to cut a full point. (Full story).
Stock investors may have also responded to the surge in the dollar and the drop in commodity prices Tuesday, said Joseph Saluzzi, co-head of equity trading at Themis Trading. The reaction seemed to indicate a perception that the Fed hasn't forgotten about the greenback and inflation, he said.
However, for the most part the rally was just a technical bounce after a period of declines, Saluzzi said, and was therefore not sustainable. He said it was mostly driven by short-covering, rather than any fundamental change in sentiment.
"Any kind of rally is going to be suspect, because another big problem could pop up at any time," he said. "I'm hearing a lot of people are in cash."
Other markets. U.S. light crude oil for April delivery fell $4.94 to settle at $104.48 a barrel on the New York Mercantile Exchange. Dow Jones reported that the drop was the biggest in dollar terms since Jan. 1991, when the United States launched an attack against Iraq in the first Gulf War. The current Gulf War began 5 years ago.
Oil prices hit a record $111.80 in electronic trading Monday.
COMEX gold for April delivery slumped $59.01 to settle at $945.30 an ounce after hitting an an all-time trading high of $1,033.90 an ounce on Monday.
Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.35% from 3.47% late Tuesday. Bond prices and yields move in opposite directions.
In currency trading, the dollar saw modest gains against the euro after bouncing Wednesday on the Fed news. The greenback stood at an all-time low versus the euro on Monday. The dollar dipped versus the yen. 
