Big rally fizzles after Fed decision

Updated: 7:25 p.m. ET

A big stock market rally ran out of gas this afternoon, even as the Federal Reserve agreed to leave its key interest rates alone.

The selling left the Dow Jones industrials ($INDU) with a gain of just 30 points at 9,802. The blue chips were up as many as 140 points just before 3 p.m. ET, and then abruptly moved lower.

The Standard & Poor's 500 Index ($INX) closed up just 1 point to 1,047, and the Nasdaq Composite Index ($COMPX) was down 2 points to 2,056.

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Futures trading sugggests a flat to slightly lower open on Thursday. However, a bullish earnings report from Dow component Cisco Systems (CSCO) may give the market something to cheer about.

Cisco shares were up 3.1% after hours to $23.95. The regular close of $23.22 was up 1.4%.

CEO John Chambers said fiscal-first-quarter results were better than expected because the company believes the economic outlook is improving. And he saw revenue growth returning for the first time the fiscal-second quarter after four quarters of declining sales.

The company earned 36 cents a share after one-items on revenue of $9 billion, down from 42 cents and revenue of $10.3 billion a year ago.

Wall Street had expected 31 cents a share in earnings and $8.75 billion in revenue.  Shares were up 3.8% after hours to $24.09 from a regular close of $23.29.

So, why did the rally fall apart? Simply saying profit-taking is disingenuous.

Here are some possibilities.

• Investors wanted more information from the Fed on how it will pull money out of the financial system to prevent a new wave of inflation or at least a number of investment bubbles. Such as gold and oil.
• There's heavy concern about Friday's jobs report.
• The House voted 331-92 to accelerate credit card reforms to Dec. 1. The proposed law only allows interest rate increases on existing balances based on limited conditions, such as when promotional rates expire or when a cardholder is late on a payment. Financial stocks sold off in the last hour.
• The dollar dropped after the Fed decision but recovered slightly near the close.

The Fed left rates alone because it said the economic recovery is still too tentative and needs help.

The central bank left the target for its federal funds rate at 0% to 0.25%. The rate -- what the Fed wants banks to charge each other for overnight loans -- is the foundation on which most U.S. interest rates are set.

The Fed also left its discount rate at 0.5%.

The Fed announcement said a recovery does appear to have started, noting that "economic activity has continued to pick up." And the statement said that "household spending appears to be expanding."

But four big issues remain: continuing job losses, sluggish incomes, a weak housing market and tight credit. Until real job growth begins, the Fed signalled, don't expect higher rates.

The Fed decision was expected. In fact, futures trading suggests the fed funds rate will remain at 0.25% or lower at least until June and won't hit 1% until the fall of 2010.

And Fed critics fear that leaving rates so low essentially gives speculators carte blanche to push gold to, say, $1,500 an ounce, and oil to $100 or more.

Private-sector companies in the U.S. cut 203,000 jobs in October, according to the ADP employment report that came out this morning. That was basically in line with estimates and the smallest decline since July 2008.

The Labor Department will issue its monthly report on unemployment and payroll employment on Friday.

Before the Fed announcement, stocks were rallying in part because the U.S. dollar was lower, which allowed oil, gold and other commodities to rise.

(The chart at right shows the dollar against the euro over the last year.)

There was also some cheer at the Republican gubernatorial victories in New Jersey and Virginia.

Crude oil was at $80.15 a barrel, up 55 cents from Tuesday. Crude had jumped to $81.06 early in the day after a government report showed smaller-than-expected domestic supplies of crude and gasoline.

Gold, meanwhile, reached $1,095 an ounce before falling back and settling at $1,087.30, up $2.40 on the day. But, after the Fed decision, gold started to rise again in electronic trading and was at $1,093.40 at 4:05 p.m. ET.

Gold has pushed higher after India's central bank bought 200 tons of gold from the International Monetary Fund. The move is seen as a hedge against the falling dollar.

Exxon Mobil (XOM) and Chevron (CVX), the energy components in the Dow, were modestly higher.

Freeport-McMoRan Copper & Gold (FCX) and Newmont Mining (NEM) were up 1.2% to $77.70 and 1.9% to $47.37, respectively.

Health care stocks were the best-performing group in the S&P 500 on the expectation that health care reform proposals will be delayed by political realities.

Four of the six top S&P 500 performers are health care stocks: DaVita (DVA), a supplier of dialysis services; health insurer Cigna (CI); drug manufacturer Merck (MRK); and health insurer Aetna (AET).

Merck, up 6.4% to $32.64, was also the top performer among the 30 Dow stocks.

Dow component Intel (INTC) was up 1.3% to $18.59 despite an antitrust lawsuit filed against the company by New York Attorney General Andrew Cuomo.

Two areas of weakness in the market: transportation and airline stocks and small-cap stocks. The Russell 2000 Index ($RUT.X) was off slightly at 570. The Dow Jones Transportation Average ($DJT) was off 22 points to 3,768. Airlines were the drag because of higher oil prices.

Nineteen Dow stocks were higher, along with 243 S&P 500 stocks and 47 stocks in the Nasdaq-100 Index ($NDX.X). The index, which tracks the largest Nasdaq stocks, was up 1.5 points to 1,681.

Separately, the service sector of the economy expanded in October for the second month in a row, the ISM nonmanufacturing index showed this morning.

The index dipped to a reading of 50.6% last month from 50.9% in September. Economists had been looking for 51.5%. Readings above 50% indicate expansion in the sector.

The two-month expansion comes after 11 straight months of contraction.

Elizabeth Strott contributed to this report.