"It's clearly a follow-through from yesterday's late afternoon swoon," said Jay Suskind, director of trading at Ryan, Beck & Co. "If the yield on the 10-year [bond] heads back to 5.25%, that's not a good thing for the market."
Adding volatility in the market was the rebalancing of the Russell indices, including the Russel 3000 index of small-cap stocks, Suskind said.
After gyrating in and out of positive territory, the Dow industrials was last down 37 points at 13,450, as 25 of its 30 stocks retreated, led by the likes of Caterpillar Inc. , McDonald's Corp. , Honeywell Corp. and Wal-Mart Stores retreated.
Exxon Mobil was the biggest gainer among blue chips. Crude oil earlier advanced towards $69 a barrel, as a general strike in Nigeria fueled concerns about oil production. But a barrel recently fell 25 cents to $68.61 a barrel.
Investors were also concerned that the meltdown in the U.S. subprime mortgage market might cause more trouble for hedge funds. The Wall Street Journal reported that the collapse of two big Bear Stearns hedge funds marks a test of the resiliency of the financial markets.
"People are wondering where the supbrime derivative tentacles are going to end up," Suskind said.
On Thursday, JP Morgan Chase , a Dow component, said it came to terms with Bear Stearns, and didn't auction the collateral it held from a Bear hedge fund, a person briefed on the matter told the newspaper.
The S&P 500 index fell 1.4 points to 1,511, while the Nasdaq Composite gained 0.6 points to 2,600.
Trading volumes showed 767 million shares exchanging hands on the New York Stock Exchange and 979 million trading on the Nasdaq stock market. Declining issues topped gainers by 19 to 12 on the NYSE and by 17 to 11 on the Nasdaq.
By sector, utilities , airlines and broker/dealers led the declines, while oil , natural gas and semiconductors .
Yields back in focus
The market tumbled when yields rose on Wednesday.
And slight weakness persisted Thursday, after the day's data did little to change the market's expectations of a bounce in economic conditions in the second quarter.
The benchmark 10-year Treasury bond was last down 2/32 at 95 2/32, sending its yield down to 5.143%.
The Philadelphia Federal Reserve said its diffusion index rose to 18.0 in June from 4.2 in May. Readings over zero indicate expansion. The increase was much larger than expected. Economists were expecting the index to rise to 8.0, according to a MarketWatch survey.
Earlier, the Labor Department reported that U.S. jobless claims reached their highest level since April, rising 10,000 to 324,000 in line with expectations.
Investors are focusing more and more on possible inflationary pressures coming from the labor market, which might prevent the Federal Reserve from cutting interest rates this year and, according to some, might lead the Fed to raise rates.
Bonds, which lose value when inflation rises, have been under pressure for several weeks amid signs of rising inflation globally. U.S. bond yields, which move inversely to price, have topped 5%, offering a risk-free alternative to stocks and lifting borrowing costs for consumers and businesses.
Of companies in focus, the board of Dow Jones said it was taking over negotiations with News Corp over a proposed $5 billion buyout from the Bancroft family that holds a controlling stake in the publisher of The Wall Street Journal. Separately, MySpace founder Brad Greenspan said he's willing to pay $1.25 billion for 25% of Dow Jones shares in a tender offer, with Greenspan saying he could boost trffic to Dow Jones Internet properties. Dow Jones is the owner of MarketWatch, the publisher of this report.
Luxottica agreed to buy Oakley for $2.1 billion, or $29.30 a share, an 18% premium to Wednesday's close.
H&R Block reported a loss and forecast current year earnings per share to be below analyst expectations.
Handset maker Nokia fell after it was downgraded to neutral from buy at Goldman Sachs, citing a more balanced risk/reward following a recent strong run.
By Nick Godt