updated 5/16/2007 8:30:35 AM ET 2007-05-16T12:30:35

Wall Street gave up most of a large rally that drove it to a new record high Tuesday, finishing narrowly mixed, after an unimpressive snapshot of the housing market unsettled investors.

Major Market Indices

Investors who initially bought enthusiastically following a tame reading on inflation decided to cash in some of their gains after the National Association of Homebuilders said its housing index dropped to 30 from 33 in April, indicating a deteriorating housing outlook.

The stock market followed a months-long pattern of rising on upbeat economic data only to give back gains on the latest report of a decline in housing. The day’s movement also followed the recent pattern of blue-chip stocks performing better than their smaller counterparts.

“We’ve got a real dichotomy going on here,” said Stephen Massocca, president of Pacific Growth Equities. “Big corporate America, the staid and stodgy companies, are doing well. They’re going up today. Stocks that are riskier, stocks that are smaller, stocks in the emerging market vein or technology vein, those are being sold.”

The Dow Jones industrial average had surged more than 100 points earlier in the day and breezed past the 13,400 level for the first time after the inflation data raised hopes that the Federal Reserve might cut interest rates later this year.

The index finished the session up 37.06 points, or 0.28 percent, rising to a new record high close after hitting a new trading high of 13,481.60 earlier in the day. The broader Standard & Poor’s 500-stock index closed with a loss of 1.96 points, or 0.13 percent, while the technology-dominated Nasdaq composite index gave up 21.15 points, or 0.83 percent.

The Labor Department said prices paid by consumers rose less than expected in April, and indicated that inflation may be easing as the economy continues to cool. The consumer price index rose 0.4 percent after rising 0.6 percent in March, while core prices — which exclude food and energy — rose 0.2 percent after a 0.1 percent gain.

“I think you’ve got certainly a slower economy, and companies and people aren’t all that keen to spend on new technology,” said Scott Wren, senior equity strategist at AG Edwards. “There’s also a lot of competition in the market, so the Nasdaq is likely to lag a little.”

Since the Dow broke through 12,000 for the first time in October, it has become almost routine for the blue chip index to set new records. The overall market advance has also lifted the S&P 500 near its record close of 1,527.46, reached in the spring of 2000. However, the Nasdaq still remains well off its closing high of 5,048.62, also reached during the peak of the dot-com boom; the index was overinflated by investors rushing to buy any high-tech stock.

Investors have been driven by optimism that the Fed is done with its campaign of rate hikes, and that it will soon start lowering rates. Still, when new data reminds them of the fragility of the housing markets, they tend to retrench as they did Tuesday.

Bonds edged higher in response to the inflation data. The yield on the benchmark 10-year Treasury note rose to 4.71 percent from 4.69 percent late Monday. The dollar fell against other major currencies, while gold prices advanced.

A barrel of light sweet crude rose 71 cents to $63.17 on the New York Mercantile Exchange. Concerns lingered in the commodities market about refinery problems and uncertainties over whether U.S. gasoline inventories can meet summer driving demand.

Fed Chairman Ben Bernanke gave the market no new insights into his views on the economy and inflation Tuesday. He addressed the growth of credit derivatives and other financial instruments during a speech before a financial markets conference in Georgia.

Investors were mostly undeterred by disappointing first-quarter results from Dow components Home Depot Inc. and Wal-Mart Stores Inc. Both companies are considered to be barometers of consumer spending, and weaker sales were interpreted as another sign of a slowing economy that could also motivate the Fed to cut rates.

Home Depot, the nation’s largest home improvement chain, posted lower quarterly profit as a sluggish U.S. housing market dented sales. Sales at stores open at least a year, an important measure of how retailers fared, slumped 7.6 percent.

Wal-Mart Stores, the world’s largest retailer, missed Wall Street projections and warned second-quarter results might be disappointing. Last week, it reported April same-store sales were the weakest its history for April.

Shares of Wal-Mart fell 22 cents to $47.62, while Home Depot shed 71 cents to $38.30. shares of Lowe’s Cos., the second-largest home improvement chain, slid 10 cents to $30.89.

Reuters Group PLC agreed Tuesday to a $17.2 billion takeover by Thomson Corp. that would vault the combined entity ahead of Bloomberg to become the world’s largest financial data and news provider. Shares of Reuters rose $2.72, or 4 percent, to $74.34; Thomson rose 16 cents to $42.16.

Overseas, Japan’s Nikkei stock average closed down 0.93 percent. Britain’s FTSE 100 gained 0.20 percent, Germany’s DAX index rose 0.61 percent and France’s CAC-40 added 0.39 percent.

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