U.S. Stocks Dip After Last Week's Gains

NEW YORK (MarketWatch) -- U.S. stocks edged lower Monday, with investors scaling back positions after strong gains in four of the previous five sessions, while financial stocks suffered from several broker downgrades.

"Last week we saw substantial gains, and we've rallied overall since the [Federal Reserve]'s emergency rate cuts," said Ken Tower, chief market strategist at Covered Bridge Tactical. "The market needs to take a pause to catch its breath."

The Dow Jones Industrial Average was down 85 points at 12,656, with 24 of its 30 component stocks trading in negative territory.

Blue-chip American Express fell 3.3% after UBS downgraded the stock. Bank stocks were also under pressure as Merrill Lynch downgraded Wells Fargo and Wachovia .

The S&P 500 index was down 11 points at 1,384, while the Nasdaq Composite was down 20.8 points at 2,392.

Technology shares also gave back some of the strong gains seen Friday, when they received a boost from news that Microsoft Corp. bid $44.6 billion for search giant Yahoo .

Trading volumes showed 318 million shares exchanging hands on the New York Stock Exchange, with declining issues topping gainers by a ratio of 18 to 11. On the Nasdaq stock market, 542 million shares traded, with decliners topping gainers by 3 to 1.

Stocks rallied in the last 10 days of January as the Federal Reserve cut interest rates by 125 basis points, down to 3%, to help prevent the U.S. economy from sliding into recession.

News that jobs unexpectedly fell in January fueled concerns about the economy, keeping the market focused on whether the central bank will continue delivering more rate cuts.

"We've ad a relief rally based on actions taken by the Federal Reserve to stabilize the financial system," said Tower of Covered Bridge. "Fed policy remains critical."

Investors will later tune in to a speech by Fed governor Randall Kroszner to gain more insight into the thinking of central bankers.

Fizz out of techs

Meanwhile, Microsoft's bid for Yahoo remained in the news Monday, after Yahoo made public an email suggesting Microsoft's bid was "one of many options." Google also traded shots with Microsoft over the weekend, with its chief legal officer David Drummond saying in a blog post the deal could undermine the open competition on the Internet.

The Wall Street Journal also reported that Google's CEO Eric Schmidt has offered his company's help in any effort to fight off the unsolicited offer

Mixed review for financials

The financial-services sector got a mixed review from analysts.

Feeling more optimistic than UBS and Merrill Lynch, Punk Ziegel analyst Dick Bove upgraded shares of Lehman Bros. to buy, citing meaningful interest rate cuts, a surge in mortgage refinancings and rising equity markets. Bove also raised his rating on Goldman Sachs , Bear Stearns , and Merrill Lynch to market perform.

But brokerage stocks, which have rallied recently, were under pressure Monday, with the Amex Broker/Dealer index was down 0.7%.

"Financials are relatively cheap on a longer-term basis," said Tower of Covered Bridge. "But I'm not sure you buy them yet. A sector can get cheap well before it actually it bottoms out and turns around."

The dollar strengthened slightly against the Japanese yen, adding 0.2% to 106.64 yen, but edged lower against the euro.

Crude-oil prices turned higher, after sliding last week, with the March-dated light crude contract up 55 cents at $89.51 a barrel.

In company news, Walgreen Co.'s January sales rose 9.6%, to $4.96 billion from $4.52 billion a year earlier, while comparable store sales increased 3.8%.

Health-benefits group Humana Inc. said fourth-quarter net profit rose 57% to $243.2 million, or $1.43 a share, topping market expectations due to a lower tax rate and gains on the sale of a venture capital investment. The firm also raied its 2008 earnings outlook.

Archer Daniels Midland Co.'s fiscal second-quarter income rose 7% to $473 million, or 73 cents a share, as a result of heightened product demand and geographic crop imbalances.

Among other companies due to report Monday, Yum Brands is expected to post earnings of 42 cents a share for the fourth quarter.

Asia markets rallied Monday, led by shares in Shanghai after the Chinese market regulator approved the launch of two new stock funds.

European stocks moved higher, with the French CAC 40 index adding 0.2% in afternoon trading.

By Nick Godt