Dow drops after see-saw day; concerns on Fed, Egypt weigh

Stocks ended a choppy trading day lower on Tuesday with investors hesitating to jump in amid concerns about the Federal Reserve's plans to scale back its bond-buying program and reports of political turmoil in Egypt.

Major averages had been higher in the morning after a better-than-expected factory orders report and upbeat auto sales. But they tumbled in the afternoon following reports that Egypt's military had drawn up plans to suspend the country's constitution, dissolve its legislature and set up an interim government.

"Egypt is definitely the wildcard—the army has issued an ultimatum so the clock is ticking…if we have a geopolitical concern, that could affect oil supply and it's a negative in the near-term until we can ascertain what the issue is," said Art Hogan, managing director at Lazard Capital Markets.

Crude oil settled at a 14-month high, just shy of $100 a barrel.

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The Dow Jones Industrial Average finished down 42 points -- back below the psychologically-important 15,000-point level. Boeing and Microsoft led the laggards, while JPMorgan held gains. At its session low, the blue-chip index tumbled more than 100 points.

The S&P 500 and the Nasdaq also closed slightly lower. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded above 16.

"Technically, if the S&P can't push above its 50-day moving average of 1,624, that becomes an area of resistance and it means this is a rally that's starting to fade," said Hogan. "This is the third time we've tested it."

All key S&P sectors turned negative, dragged by industrials.

"Expect the market to be fairly mercurial—especially this week. The volume is still pretty anemic," said Keith Bliss, senior vice president at Cuttone & Co. "The longer-term trend is still positive, since we sold off so harshly last week, but we're going to have bumps in the road. We're in a period where economic data will be OK to good, but not enough to make the Fed really back away from its policy."

Earlier, New York Fed president William Dudley reiterated his comments that the Fed's asset purchases could continue at a higher pace than that outlined last month by Chairman Ben Bernanke, if the labor market and economic growth lagged the central bank's expectations.

"Statistically, if the first half of the year is positive, it tends to set a positive tone for the second half, but these are based on data that include periods where markets were not focused on liquidity from central banks," said Quincy Krosby, market strategist with Prudential Financial.

On the economic front, factory orders gained 2.1 percent in May, rising for a second-straight month, according to the Commerce Department. Economists polled by Reuters had expected a gain of 2 percent.

Stocks globally were a mixed bag.

In a widely-expected move, the Reserve Bank of Australia left its cash rate unchanged at 2.75 percent, and stated that the Australian dollar was still at high levels. In reaction, the currency lost nearly 1 percent to fall below the $0.92 handle against the greenback. Australia's benchmark S&P ASX 200 closed 2.6 percent higher.

A weaker currency also helped the Japanese Nikkei, which crossed the key 14,000 points to hit a new one-month high. The Shanghai Compositereversed earlier losses to rise above the 2,000 mark, its highest level in over one week.

However, shares in Europe traded lower, as tensions rose in Italy's fragile coalition government. Prime Minister Enrico Letta called a government meeting after the Civic Choice (Scelta Civica) party threatened to withdraw from the coalition on Monday, citing frustration with the slow pace of reforms.

Second-quarter earnings season will officially kickoff next week, when Dow component Alcoa reports on July 8. Market expectations are low for earnings, with S&P Capital IQ knocking down its expectations again this week to 2.8 percent for the S&P 500 bottom-line profit.

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