Wall StreetCaution returned to Wall Street Tuesday ahead of results of the government’s stress tests of banks.

Stocks fell in midafternoon trading following a jump Monday that sent the Standard & Poor’s 500 index into positive territory for the year and the Dow Jones industrials up more than 200 points. Positive news on the housing market drove the gains.

“Today’s action, just drifting around, is not that surprising given Monday’s rally,” said Darin Newsom, a senior analyst at DTN in Omaha, Neb.

Analysts said the market had little reaction to comments from Federal Reserve Chief Ben Bernanke, who told Congress the economy should start growing again later this year. Bernanke did warn that even after a recovery begins, the economy will still show signs of weakness, but that caveat didn’t surprise investors.

“I thought in general, the comments were optimistic, but I’m not sure they told us anything new,” said Bill Stone, chief investment strategist at PNC Wealth Management.

A growing amount of upbeat economic data have driven stocks to their best two-month performance in nearly 35 years. However a number of dark clouds still hang over Wall Street, including growing unemployment and mixed news from first-quarter corporate earnings reports.

This week, two major news events could easily upset the market’s mood. Results are due out Thursday for the government’s “stress tests” on banks, and on Friday the government will report monthly employment data, one of the economic indicators most closely watched by investors.

The Dow fell 45.24, or 0.5 percent, to 8,381.50. The Standard & Poor’s 500 index fell 7.89, or 0.9 percent, to 899.35, while the Nasdaq composite index lost 22.47, or 1.3 percent, to 1,741.09.

About three stocks fell for every two that rose on the New York Stock Exchange, where volume came to 844.8 million shares.

The Russell 2000 index of smaller companies fell 8.01, or 1.6 percent, to 498.81.

Among the economic data Tuesday, a private report on the service sector showed a seventh straight month of contraction. However, the pace of decline slowed more than expected — further evidence that the economy’s slide is moderating.

The report did little to stoke buying, but the market’s pullback was moderate.

“We’re really not pushing the market that much lower right now,” Newsome said. “There is still this general sense that things have improved a bit.”

Investors are mindful that the stock market typically turns around, on average, about four months ahead of the economy. With Monday’s gain, the S&P 500 is up 34.1 percent since the rally began March 9. The Dow is up 28.7 percent.

Liz Ann Sonders, chief investment strategist for brokerage Charles Schwab & Co., said at a press briefing in New York on Tuesday that the economy could have stopped sliding.

“There is some chance, it may not be more than a slim chance, but some chance that we may actually already be out of the recession,” she said. Sonders cautioned that a recovery could always reverse and send the economy back into a slump.

Analysts warn that the market’s advance will continue to be put to the test.

“Over the past several weeks we’ve come through a period where all data was interpreted through rose-colored glasses,” said Lawrence Creatura, portfolio manager at Federated Investors. “Now, it’s a question of whether investors continue to have that perspective.”

Investors are focused this week on the results of the stress tests, which will provide details on the U.S. financial companies in need of more capital. Reports have surfaced indicating that Citigroup Inc., Bank of America Corp. and Wells Fargo & Co., as well as a handful of regional banks, will be among those needing help.

On Tuesday, The Wall Street Journal said about 10 of the 19 banks undergoing the tests will be required to boost their capital levels as a buffer against potential future losses. The report cited several unidentified people familiar with the matter.

Regulators have said no large institution will be allowed to fail, and have pledged government funds if necessary. Though some investors are worried the report could indicate more pain in the industry than previously thought, many analysts say results of the tests are largely priced into the market already.

Financial stocks were mixed Tuesday. Bank of America Corp. rose 45 cents, or 4.3 percent, to $10.83, while Wells Fargo & Co. fell 89 cents, or 3.7 percent, to $23.36.

In earnings news, Dow component Kraft Foods Inc. said its first-quarter profit rose a better-than-expected 10 percent even as sales dropped. Shares of the maker of Velveeta, Oreo cookies and Maxwell House coffee jumped $1.34, or 5.5 percent, to $25.60.

Bond prices dipped, pushing the yield on the benchmark 10-year Treasury note up to 3.18 percent from 3.16 percent late Monday.

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude fell 40 cents to $54.07 on the New York Mercantile Exchange.

Overseas, Britain’s FTSE 100 rose 2.2 percent, Germany’s DAX index fell 1 percent, and France’s CAC-40 fell 0.4 percent. Markets in Japan were closed for a national holiday.

Copyright 2009 The Associated Press.