"The major averages fell into the red in midday action as a bond yields rose towards their best levels of the day," said Frederic Ruffy, analyst at Optionetics. "With no economic news to help guide trading, bonds fell early in the day on profit-taking."
The Dow Jones Industrial Average closed down 146 points at 13,489.42, as 24 of its 30 components retreated, led by the likes of JP Morgan Chase & Co. , McDonald's Corp. , Merck & Co. , and Pfizer Inc. .
Exxon Mobil Corp. fell the hardest, losing 3.5% as crude oil fell.
Leading the gains among blue chips, shares of Home Depot surged 4.6% after the home-improvement announced it would buy back up to $22.5 billion of its own shares.
The S&P 500 index fell 20.86 points to 1,512.84 while the Nasdaq Composite lost 26.8 points to 2,599.96.
"There might be some near-term weakness because of the slowdown in summertime trading and a little less conviction one way or another," Robert Pavlik, chief investment officer at Oaktree Asset Management, tells MarketWatch. Pavlik says stocks will probably pull back some 3-5% this summer.
Trading volumes showed 1.672 billion shares exchanging hands on the New York Stock Exchange and 2.034 billion on the Nasdaq stock market. Declining issues topped gainers by more than 3 to 1 on the NYSE and by 21 to 8 on the Nasdaq.
Oil pulls back, yields rise
Crude-oil futures fell sharply after weekly data showed a surprise build in crude oil and gasoline inventories. A barrel fell 68 cents to close at $68.86.
Rising oil prices had grabbed investor attention in recent session as a barrel topped $69 amid concerns over production from Nigeria and refining capacity in the U.S.
But Wednesday's fall couldn't offset concerns over higher bond yields. Rising yields have also pressured the stock market over the past couple of weeks, as they provide a risk-free alternative to stocks, while also raising borrowing costs for consumers and businesses.
On Wednesday, the benchmark 10-year Treasury bond reversed early gains to finished down 10/32 at 95 6/32, lifting its yield to 5.125%.
Since last week, the bond market had regained some ground, sending yields lower and boosting the stock market.
"Interest rates moving back down closer to 5% is a big part of the story, helping to explain why we're seeing more money flows into U.S. equities over the past week," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.
Investors are also starting to monitor earnings, which are starting to trickle through before the official reporting season begins in July.
Shares of FedEx Corp. rose 1.6% after the company reported a 7% quarterly profit rise, helped by a settlement with Airbus over a cancelled order for the A380 superjumbo.
Circuit City rebounded from early weakness after it reported, as expected, a quarterly loss, following disappointing results from rival Best Buy Co. Inc. .
"We seeing some weakness from Best Buy and Circuit City, suggesting that the economy is not going to re-accelerate to the same extent as was thought a few weeks ago," Fitzpatrick said.
By sector, oil , real estate investment trusts and utilities led the downside. Airlines , telecoms and broker/dealers advanced.
"Among market sectors, we are watching transportation and utility stocks closely," said Michael Sheldon, chief market strategist at at Spencer Clarke. "If we see a further decline in these two former market leaders, this could lead to a more broad-based pullback for the overall market."
Brokers in focus
Brokes, which often lead the financial sector and the broad market, got a boost after Morgan Stanley said second-quarter earnings were up 40% from the year earlier, widely beating analysts estimates. Its shares rose at first, but closed down 0.5%.
Curbing enthusiasm for the sector, The Wall Street Journal reported that two big hedge funds run by Bear Stearns were close to being shut down as a rescue plan fell apart. Shares of Bear Stearns dropped 2.5%.
Merrill Lynch & Co. , one of the hedge funds' lenders, said it would move to seize collateral -- much of it mortgage-backed debt -- from the two funds and sell it, according to documents reviewed by the newspaper.
At the same time, the funds' managers worked with a handful of other key lenders, including Goldman Sachs Group Inc. and Bank of America Corp. , to pay off the funds' $9 billion in loans, the Journal reported, citing a person familiar with the matter.
The dollar was up against the euro and the yen , pressuring gold futures, which fell $4.70 to close at $660 an ounce.
Shares of MGM Mirage fell more than 10% after talks between the casino operator and majority shareholder Tracinda Corp. about the purchase of the Bellagio Hotel and Casino and CityCenter properties broke down.
By Nick Godt