U.S. Stocks Drop As Commodity-related Shares Pave The Way

NEW YORK (MarketWatch) -- U.S. stocks fell heavily Wednesday, giving up an early effort to extend the market's best day in nearly five years, with commodity-related sectors leading the decline following the Federal Reserve's calls against inflation.

"The bigger story is the big decline in commodities today -- one of the more subtle messages out of the Fed statement yesterday was a fair warning to commodity speculators," said William Knapp, managing director at New York Life Investment Management's Equity Investor's Group.

"Some of the air got taken out of the speculative bubble -- the sectors going down are the commodity-related ones, oil producers and miners," he added.

After being up-and-down much of the session, the Dow Jones Industrial Average fell 166.24 points to 12,226.42, with 23 of its 30 components trading in the red, with the losses led by the likes of Chevron Corp. , which is off 3%, and Exxon Mobil Corp. , down 2.8%.

Blue-chip gains were fronted by JPMorgan Chase & Co. , up 1.8%.

The S&P 500 Index fell 15.69 points to 1,315.05, while the Nasdaq Composite Index slid 24.82 points to 2,243.44.

Volume on the New York Stock Exchange topped 3.7 billion, with declining stocks edging ahead of those advancing 3 to 2. On the Nasdaq, more than 1.5 billion shares traded hands, and declining issues topped those advancing 4 to 3.

Commodities comedown

On the New York Mercantile Exchange, crude futures for April delivery fell $5.72 to $103.70 a barrel, paring their losses after data showing U.S. inventories climbed less than forecast last week. .

Elsewhere on the NYME, gold futures dropped $4.40 to trade at $940.9 an ounce.

Ahead of the opening bell, the Office of Federal Housing Enterprise Oversight said that it would reduce, but not eliminate, the excess-capital requirement, giving Fannie Mae and Freddie Mac more flexibility to buy and securitize loans.

Fannie shares were recently up 10.1% while Freddie jumped nearly 15.3%.

"Even though the stock market rebounded Tuesday, I'm not sure it's bottomed out yet -- the best indicator of recovery is when the portfolio of financial-services stocks rebounds," according to Narayanan Jayaraman, a finance professor at the Georgia Institute of Technology College of Management.

"The performance of Visa's IPO [Wednesday] also will reveal a lot about investor sentiment regarding the financial services industry," said Jayaraman.

Shares of Visa Inc. soared nearly 36% higher in their trading debut, as the credit-card giant lays claim to the largest initial public offering of stock in U.S. history.

Morgan Stanley climbed 2.1% after the investment bank reported a smaller than forecast fall in profit of 42%.

Nokia Corp. fell 9.3% after Sony Ericsson, the nonlisted joint venture of Sweden's Ericsson and Sony Corp. , warned lower sales than anticipated would dent its first-quarter numbers. Ericsson shares were down 9.6%.

Other active issues included U.K.-based mining operator Rio Tinto PLC , off 7%

Elsewhere, Apple Inc. fell 1.2%. The Financial Times reported that Apple is considering a plan to give customers free access to iTunes music in exchange for paying a premium for iPods and iPhones. .

And, Adobe Systems climbed 10.5% after forecasting second-quarter earnings above Wall Street estimates. .

Overseas, Asia markets put in a strong performance, with a 2.5% rise for the Nikkei 225 in Tokyo.

Europe markets weren't so strong, with the FTSE 100 slipping 0.7%, as market jitters briefly sent shares of British lender HBOS 17% lower. The lender denied it had liquidity problems and recovered much of its losses.

On Tuesday, the Dow industrials rose 420 points, the S&P 500 added 54 points and the Nasdaq Composite rose 91 points after Lehman Brothers Holdings Inc. and Goldman Sachs Group offered relief on earnings and the Federal Reserve cut iterest rates by three-quarters of a percentage point.

Equities are bound to drift in the wake of Tuesday's rally, said CAZ Investments Chairman Christopher Zook, who chalks up much of the prior day's move higher to traders covering short positions.

"What we now need to see to feel like a true bottom has been reached is that natural buyers are willing to step in and put capital to work in a long-term horizon," said Zook. .

By Kate Gibson