Stocks mixed as oil spikes
The Dow and S&P 500 manage slim gains as crude posts second-biggest one day gain ever, the dollar falls, and the financial sector cuts losses.
NEW YORK (CNNMoney.com) -- Stocks were mixed Thursday, as a nearly $6 spike in oil prices lifted energy stocks, but dragged on many other areas of the market.
The Dow Jones industrial average (INDU) added a few points and the broader Standard & Poor's 500 (SPX) index rose around 0.2%. The Nasdaq composite (COMP) declined 0.4%.
Oil prices rallied $6.48 a barrel during the session, before retreating a bit to settle at $121.18, a gain of $5.62 per barrel. Crude spiked on the weaker dollar, which makes dollar-traded commodities cheaper to buy; tensions in Russia, which caused worries about supply disruptions; and renewed fears about a U.S. recession.
Meanwhile, jobless claims fell for the second week in a row, the Philadelphia Fed index showed continued weakness in manufacturing and an index of leading economic indicators fell more than expected.
Also in focus: financial shares, which managed to trim earlier losses despite more worries about Fannie Mae, Freddie Mac and Lehman Brothers.
Oil price boom resumes: An advance in oil, gold, silver and other resources over the last three sessions seems to have put an end to a month-long selloff in commodities, sparked by a stronger dollar and bets that global demand for oil will retreat.
Crude peaked at $147.27 a barrel in mid-July and settled at a more than 3-1/2-month low of $112.87 a barrel Monday. That selloff boosted stocks, as investors reallocated funds into financials and other sectors that had been battered year-to-date. But that's changing now.
"The correction in oil, gold and many commodities appears to have run its course," said Rob Lutts, chief investment officer at Cabot Money Management. He said oil is now likely to go back up to the mid-July highs or even beyond.
Most of the major commodities came down between 20% and 25% over the last month or so, according to Lutts, which is a normal pullback in a bullish phase, rather than an indication that prices are set to keep sliding.
At the same time this drop in commodities occurred, stocks rallied, as investor psychology changed from panic about rising oil prices to a belief that prices were going to continue to fall.
That psychology is changing again. "I think the [stock] market is adjusting to the reality that oil prices may not continue to drop," he said.
However, as significant as the fluctuations in the oil market are to investors, they pale in comparison to the mortgage market meltdown, said Bob Andres, chief economic strategist at Envestnet Asset Management.
"The central issue that stops us from moving forward right now is housing," Andres said. "I think the crisis has been and is bigger than a lot of people are willing to admit."
He said until there is some kind of significant breakthrough on that front, the market and the economy will not be able to make substantial improvements.
"We will get through this ultimately," he said. "It's just going to take time and continued innovation on the part of the Fed."
Financials stocks: Fears of a government takeover of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have dragged on those stocks and the broader financial sector. On Thursday, Fannie shares hit a 20-year low before bouncing back, while Freddie flirted with an all-time low before closing off those levels.
Lehman (LEH, Fortune 500) slumped through the early afternoon on worries about its financial solvency. But the stock recovered late in the session after an analyst upgraded the stock and said it could become a hostile takeover candidate.
Lehman had initially dropped after a Citi Investment Research analyst cut his third-quarter forecast for the bank, along with those of Morgan Stanley and Goldman Sachs. The analyst also predicted steep quarterly writedowns related to bad mortgage bets for all three banks. Bank of America Securities also issues a dour note on the sector.
Morgan (MS, Fortune 500) and Goldman (GS, Fortune 500) shares ended the session with small losses.
Lehman's money problems led the firm to hold secret talks with South Korean and Chinese investors to try and sell up to half of its shares, the Financial Times reported, although no deal was reached. However, the Chinese firm in question denied any knowledge of talks with the company.
Meanwhile, the Wall Street Journal reported that the Federal Reserve quizzed Credit Suisse last month about a rumor that it had pulled a line of credit from Lehman. However, Credit Suisse reportedly said that it had not done so and had no plans to.
Other movers: One upside during Thursday's session was that oil stocks jumped. With the energy sector the second-biggest in the S&P 500 after technology, the rise in stocks such as Exxon Mobil (XOM, Fortune 500) and Chevron (CVX, Fortune 500) helped offset weakness in technology and financial shares.
In earnings news, JDS Uniphase (JDSU) posted a wider fourth-quarter loss that was worse than analysts were expecting. Shares of the communications gear maker lost 14% in active Nasdaq trading.
A variety of airline stocks tumbled in response to the rise in oil prices, with higher fuel costs cutting into air carrier profits. The Amex Airline (XAL) index lost 4.1%.
AIG (AIG, Fortune 500), GM (GM, Fortune 500), Intel (INTC, Fortune 500), JP Morgan Chase (JPM, Fortune 500) and Coca-Cola (KO, Fortune 500) were the Dow's biggest losers.
Market breadth was negative. On the New York Stock Exchange, decliners beat advancers nine to seven on volume of 912 million shares. On the Nasdaq, losers topped winners eight to five on volume of 1.57 billion shares.
Economic news: The Philadelphia Fed index, a regional manufacturing survey, posted a reading of minus 12.7 versus forecasts for a weaker number. The prior month's reading was minus 16.3. Any reading that is negative suggests weakness, while a positive reading suggests growth.
The index of leading economic indicators(LEI) slumped 0.7% in July, topping forecasts. June LEI was revised to neutral from an initial decline of 0.1%.
The number of Americans filing new claims for unemployment fell last week by more than expected, the government reported. However, the figure remained above the key 400,000 level for the fifth week in a row. (Full story).
Other markets: In the bond market, Treasury prices fell, raising the yield on the benchmark 10-year note to 3.83% from 3.79% late Wednesday. Prices and yields move in the opposite direction.
In currency trading, the dollar was little changed versus the euro and the yen.
COMEX gold for October delivery rose $19.70 to settle at $835 an ounce.
Retail gas prices dropped overnight, extending the downward trend for a 35th day, according to a survey of gas station credit-card activity. (Full story.) 
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