Stocks lower after Monday's big surge

NEW YORK -- Stocks gave back some gains Tuesday as investors looked for fresh signals about Wall Street's direction a day after the market's biggest advance in five months.

Some pullback was expected after the Dow Jones industrial average jumped 498 points, or 6.8%. Investors extended a two-week rally after the government detailed a plan to buy up to $1 trillion in toxic assets from financial companies with the help of private investors. An unexpected rise in home sales also lifted the mood of traders.

Traders said the market was short on fresh fuel to extend the rally that has propelled stocks up about 20% in 10 days.

As bank stocks lost ground in late afternoon trading, the Dow Jones industrial average fell 115, or 1.5%, to 7,660. The index fell as many as 111.51 points, rose briefly in afternoon trading, and then turned lower again. The Dow had jumped 6.8% on Monday, its biggest gain since late October.

Broader stock indicators also slid. The Standard & Poor's 500 index fell 17, or 2%, to 806, and the Nasdaq composite index fell 37, or 2.4%, to 1,518.

Analysts often welcome a time-out after big days in the market to determine whether the move was overdone. On Tuesday, energy and commodity stocks weighed on the market as oil prices fell.

Oil has risen more than 30% this month as the dollar weakened and as traders wagered that the slide in the world's economy could be slowing. Energy prices had fallen in recent months as traders feared that economic weakness would crimp demand.

Lately, some traders contend that an economy many had written off is revealing nascent signs of renewal. The government on Monday sparked new hopes that things would improve after it detailed plans for a mix of taxpayer and private money to help banks get rid of up to $1 trillion in bad loans from their books.

Investors again looked to Washington for direction on Tuesday.

With little economic data to go on, investors will again be looking to Washington for direction. Federal Reserve Chairman Ben are making a rare joint appearance at a congressional hearing to testify over

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner made a rare joint appearance at a congressional hearing to testify over bonuses at American International Group. Geithner called on Congress to provide him with greater power to safely dismantle big financial companies like AIG that pose risks to the economy.

Phil Orlando, chief equity market strategist at Federated Investors in New York, said many traders are pleased by the government's plan to help banks but said that signs of an improving economy will be needed for the market to hold its gains. He said nagging worries about big problems like unemployment could shake investors.

"I can absolutely expect some profit taking here," he said of the retrenchment Tuesday. "We are treating this cautiously as we recognize that there are still some storm clouds on the horizon."

On Monday, the Dow and the S&P 500 posted their biggest percentage gains since Oct. 28. The market's reaction to the announcement was a departure from last month, when stocks tumbled after Geithner announced the bad asset program but offered few details about how it would work.

Some analysts warn that stocks could find it harder to extend their gains now that Dow is up more than 1,000 points from March 9, when the index and the S&P finished at their lowest levels in nearly 12 years.

Nick Kalivas, vice president of financial research at the brokerage MF Global in Chicago, said stocks could be stuck in neutral because of the enormity of this month's gains and as traders await quarterly results and forecasts from companies. For most companies the first quarter ends March 31.

"There is not much more of a catalyst to go higher on," he said. Kalivas contends the coming corporate results could either bolster a sense that the economy is poised to recover or pelt investors with more grim predictions.

More bad news could hurt. A 20% rise from late November to January fizzled and sent stocks to new lows as worries about the economy dogged traders.

Citigroup touched off the latest advance in stocks that began March 10 after it said it was profitable in the first two months of the year. Stocks of big financial companies have rocketed 54.5% since then. For the recovery to continue, traders will be looking for any signs that banks are starting to patch holes in their balance sheets.

Some analysts say the overall economy must stabilize for banks to regain their footing. The problems in the overall economy are bad for banks: The unemployment rate sits at 8.1%, the highest level since the punishing recession of the early 1980s. And housing prices continue to fall, putting more homeowners at risk of owing more on their homes than they are worth. Rising numbers of people out of work or behind on mortgages could further imperil bank assets.

It also won't be easy to wean the economy from a diet of excessive debt. Some businesses and consumers are struggling to pay down what they owe. They're cutting spending, which is hurting other parts of the economy.

But analysts note that bleak expectations could ultimately help the market. On Monday, investors pounced on a report showing pending home sales jumped in February. Economists had expected they would fall.

Other surprises have helped feed the rally that has given the Dow its first back-to-back weekly gains in close to a year. Recent reports on retail sales, housing starts and inflation have all topped traders' bleak expectations.

The government has also played a better game in recent weeks, traders say. Stocks jumped last week after the Fed said it would buy long-term government debt to help drive down interest rates for home loans and credit cards.

The rally on Monday following the release of details behind the government's bank aid plan was a sharp contrast to a month ago, when the market slid on disappointment over hearing Geithner's outline for the program, which was short on specifics.

Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, dipped to 2.65% from 2.68% late Monday.

The dollar was mixed against other major currencies, while gold prices fell.

Oil fell 13 cents to $53.67 a barrel on the New York Mercantile Exchange.

Overseas, Britain's FTSE 100 fell 1%, Germany's DAX index rose 0.3%, and France's CAC-40 rose 0.2%. Japan's Nikkei stock average rose 3.3%.