U.S Stocks slumped

As per the CNN news U S Stocks slumped Wednesday afternoon, erasing early gains, as investors backed out of a variety of the sectors that had led the previous session's big rally, including the financial sector.

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 lost 1.2% with roughly 2 hours left in the session. The broader Standard & Poor's 500 index lost 1.2%. The Nasdaq composite lost 1.2%. 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.
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But trading was choppy Wednesday as investors mulled better-than-expected earnings from Morgan Stanley and news that regulators will let Fannie Mae and Freddie Mac buy more home loans. A pullback after a big rally was not surprising, said Joseph Saluzzi, co-head of equity trading at Themis Trading.

He said that Tuesday' rally itself doesn't seem like it had any substance to it as it was driven mostly by short-covering, rather than any fundamental change in sentiment. 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. "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."
Financial sector. Morgan Stanle 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. Shares of Fannie Mae and Freddie Mac 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.
However, other financial shares slumped in active trading, including Lehman Brothers , Goldman Sachs and Bear Stearns. JP Morgan Chase inched higher. The Wall Street firm said earlier this week that it was buying Bear Stearns for fire sale prices. Among other stock movers, oil services stocks including Chevron and Exxon fell in tandem with oil prices.

Gold stocks fell, along with the commodity, dragging the Amex Gold Bugs index down 5.6%.
Market breadth was negative. On the New York Stock Exchange, losers beat winners nine to seven on volume of 1.12 billion shares. On the Nasdaq, decliners topped advancers four to three on volume of 1.34 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.

Investors may have also scooped up stocks in relation to what happened in the currency and commodity markets, Saluzzi said, noting that after the Fed announcement, the dollar rallied and gold slumped.