Stocks saw some weakness during trading on Tuesday, as traders cashed in on the standout gains that were posted in the previous session. Nonetheless, the major averages ended the session well off their worst levels of the day.

While profit taking contributed to the lower close, the major averages managed to hold onto the bulk of Monday's gains, which is likely to be seen as a positive sign for the markets. Some upbeat remarks from Federal Reserve Chairman Ben Bernanke may have helped to limit the downside.

Earlier in the day, Fed Chairman Bernanke testified before the Joint Economic Committee of Congress, noting that recent data has suggested that the pace of contraction in the U.S. economy may be slowing.

While the Fed chairman also said that recent data shows some signs that the beleaguered housing market may be bottoming, he noted that the available indicators of business investment remain extremely weak.

Looking forward, Bernanke said economic activity is expected to bottom out then turn up later this year. Nonetheless, he noted that the rate of growth of real economic activity is likely to remain below its longer-run potential for a while.

Minneapolis Fed President Gary Stern made similar remarks, predicting that an improvement in the economic is not too far off. While Stern said the pace of expansion is likely to be subdued for a time, he forecast a resumption of healthy growth by the middle of 2010.

Backing up the assertions from the Fed officials, the Institute for Supply Management released a report showing a bigger than expected slowdown in the pace of contraction in service sector activity in the month of April.

The report showed that the ISM's index of activity in the service sector rose to 43.7 in April from 40.8 in March, with a reading below 50 indicating a contraction in the sector. Economists had been expecting a more modest increase to a reading of 42.2.

The ISM released a similar report last Friday showing a bigger than expected slowdown in the pace of contraction in manufacturing activity.

In an interview with RTT News, Ken Tower, senior vice president of Institutional Research at Quantitative Analysis Service, said the market has turned a major corner, predicting a decent rally in the second half of the year.

While Tower said it's not likely to be a traditional three year bull market cycle, he said we should be able to get a very nice, strong rally from May or June on.

The major averages staged a notable recovery attempt in late-day trading but still ended the session modestly lower. The Dow closed down 16.09 points or 0.2 percent at 8,410.65, the Nasdaq closed down 9.44 points or 0.5 percent at 1,754.12 and the S&P 500 closed down 3.44 points or 0.4 percent at 903.80.

Sector News

While most of the major sector indices moved off their worst levels of the day going into the close, considerable weakness remained visible among banking stocks. The S&P Banks Index closed down 2.8 percent after ending Monday's trading at a three-month closing high.

Among banking stocks, Wells Fargo (WFC) showed a significant decline, ending the session down 4 percent after setting a three-month closing high on Monday. Fifth Third Bancorp (FITB) and KeyCorp (KEY) also posted notable losses.

Natural gas stocks also pulled back well off the highs set in the previous session, dragging the Amex Natural Gas Index down 2.6 percent off the nearly seven-month closing high it set on Monday. A notable decrease by the price of natural gas contributed to the weakness in the sector.

Chesapeake Energy (CHK) helped to lead the natural gas sector lower, with the oil and gas company closing down 10.6 percent. The loss by Chesapeake came after the company reported a steep first quarter loss due to writedowns of the value of its gas and oil properties.

While profit taking also contributed to notable weakness in the real estate, electronic storage, and railroad sectors, most of the stocks ended the day well off their lows for the session.

On the other hand, health insurance stocks moved sharply higher on the day, resulting in a 5.3 percent gain by the Morgan Stanley Healthcare Payor Index. Within the sector, WellCare (WCG) jumped 18.3 percent on news of the resolution of a government fraud investigation.

Airline, healthcare provider, and telecommunications stocks also turned in strong performances, helping to lift the major averages well off their worst levels of the day.

Dow Components

A majority of the Dow components ended the day in negative territory, contributing to the loss posted by the blue chip index.

Reflecting the weakness in the banking sector, JP Morgan (JPM) turned in one of the Dow's worst performances, ending the session down 2.7 percent. The loss by JP Morgan came after it ended Monday's trading at a nearly five-month closing high.

Shares of American Express (AXP) also showed a notable decline, with the credit card giant closing down 2.6 percent after ending the previous session at its best closing level in six months.

Procter & Gamble (PG), Intel (INTC), and Alcoa (AA) were among the other Dow components that posted notable losses.

Meanwhile, shares of Kraft (KFT) closed up 4 percent after the food maker reported first quarter earnings that rose more than analysts had expected. With the gain, Kraft ended the session at its best closing level in over two months.

Citigroup (C) and Bank of America (BAC) also posted notable gains, helping to limit the downside for the Dow.

Other Markets

In overseas trading, stocks markets across the Asia-Pacific region saw some further upside on Tuesday after seeing considerable strength in the previous session. However, the Japanese market remained closed for the second straight day.

The major European markets turned in a mixed performance, as stocks in London played catch up after the market was closed on Monday. While the U.K.'s FTSE 100 Index jumped 2.2 percent, the French CAC 40 Index fell 0.4 percent and the German DAX Index fell 1.0 percent.

In the bond market, treasuries showed a lack of direction over the course of the trading day, with the benchmark ten-year note ending the session flat. Subsequently, the yield on the ten-year note closed unchanged at 3.157 percent.

Looking Ahead

Trading on Wednesday could be impacted by the release of quarterly results from Disney (DIS), Electronic Arts (ERTS), and Pulte Homes (PHM) after the close of trading today.

Additionally, the release of Automatic Data Processing's (ADP) report on private sector employment in the month of April could shed some light on the strength of the Labor Department's monthly employment report.

Nonetheless, trading activity may be somewhat subdued ahead of the release of the results of the government's stress tests of the nation's largest financial firms on Thursday.

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