Wall St.: Rally, then retreat

Dow, S&P, Nasdaq retreat in response to existing home sales report.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- A disappointing existing home sales report sent stocks lower Monday afternoon, reviving investor worries about the mortgage and credit markets.

Stocks were also vulnerable after last week's big rally.


The Dow Jones industrial average (down 28.77 to 13,350.10, Charts) lost 0.2 percent with two hours left in the session, while the broader S&P 500 (down 8.91 to 1,470.46, Charts) index lost around 0.6 percent. The tech-fueled Nasdaq Composite (down 10.37 to 2,566.32, Charts) lost 0.4 percent.

The Russell 2000 (down 8.00 to 790.93, Charts) small-cap index fell 1 percent.

Stocks opened lower and fell anew after a report showed that existing home sales dropped in July, and the number of homes on the market jumped to a 16-year high.

The report countered last Friday's new home sales reading, which showed some recovery for the sector.

"People are paying very close attention to the housing market and we're going to keep seeing this back and forth with the data," said Russell Lundeberg, Jr., chief investment officer at Barrett Capital Management.

On the upside, underlying economic conditions still look pretty robust outside the housing market, Lundeberg said. Meanwhile, corporate earnings remain decent.

Yet, "I think people are still hesitant to believe that the worst is over," he added.

Stocks have had a tough summer as worries about tightening of the credit markets and fallout in the housing market caused investors to dump stocks in favor of Treasury bonds and other safe-haven investments. However, last week brought a brief reprieve.

Stocks rallied last week, with the Dow and S&P 500 adding around 2.3 percent, while the Nasdaq gained almost 2.9 percent as investors welcomed signs that the economy is holding up outside of housing.

Reassurance was also provided by the Federal Reserve and central banks around the world, which have infused billions into their banking systems to keep money flowing.

Investors are now hoping that the Federal Reserve will cut a key short-term interest rate -- one that affects consumer loans -- at its policy meeting next month. The central bank already cut the discount rate, which affects bank loans.

But after last week's big run, stock investors were more cautious Monday, particularly amid continued signs that the recent buyout boom could be waning.

To that effect, Home Depot (up $0.66 to $35.34, Charts, Fortune 500), a Dow component, has reportedly slashed the price for the sale of its supply business to private equity firms to $8.5 billion from $10.3 billion. The shortfall reflects the credit market jitters that have weighed on investors this summer.

Yet, Gateway (up $0.59 to $1.80, Charts) stock rallied 50 percent after Taiwan's Acer agreed to buy the computer maker for $710 million.

Duke Energy (down $0.64 to $17.90, Charts, Fortune 500), Exelon Corporation (down $2.85 to $70.29, Charts, Fortune 500) and American Electric Power (down $1.48 to $45.29, Charts, Fortune 500) were among the stocks dragging down the Dow Jones Utilities (down 13.96 to 484.84, Charts) index by over 3 percent.

A variety of housing, financial and metals and mining stocks also slipped.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by over two to one on volume of 680 million shares. On the Nasdaq, decliners topped advancers nine to five as 870 billion shares changed hands.

Treasury prices rose, lowering the yield on the 10-year note to 4.60 percent from 4.61 percent late Friday. Bond prices and yields move in opposite directions.

In currency trading, the dollar rose versus the euro and eased against the yen.

U.S. light crude oil for October delivery rose 51 cents to $71.60 a barrel on the New York Mercantile Exchange.

COMEX gold fell 70 cents to $676.80 an ounce. Top of page