Wall Street takes another big hit

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NEW YORK (CNNMoney.com) -- Stocks tumbled Monday, with the market falling into the technical definition of a correction - a slide of 10 percent off the highs - for the second time in 2007.

The Dow Jones industrial average (Charts) lost 237 points, or 1.8 percent, falling to a 7-month low. The S&P 500 (Charts) index lost 2.3 percent and fell into negative territory for the year. The Nasdaq composite (Charts) fell 2.1 percent.

Treasury prices jumped, lowering the corresponding yields to the lowest levels since mid-2005, as investors sought safety in response to the stock selloff.

Early reports from the nation's retailers were positive, but were soon overshadowed by revived worries that the financial and housing market crisis could send the economy into a recession.

Those worries were sparked by the drop in bond yields and developments in the financial sector.

"The equity market is taking more of its cues from the the bond market these days and the bond market seems to be signaling that we could be in recession," said John Davidson, president and CEO at PartnerRe Asset Management.

Adding to these concerns: news that HSBC Holdings (Charts) is stepping in to bail out two of its flailing funds, bets that Citigroup (Charts, Fortune 500) could announce big layoffs and analyst downgrades of government-backed mortgage lenders Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500) slumped on an analyst downgrade.

"The fear is that there is more bad news out there, considering that it continues to dribble out from financial institutions," said Timothy Ghriskey, chief investment officer at Solaris Asset Management.

Ghriskey said that stocks are unlikely to bounce back on a significant level until there is a sense that the bad news is all out in the open.

The S&P 500 index "corrected" this summer, dropping more than 10 percent off its 2007 peak to hit that low during the session on Aug. 16, at the height of the credit market panic. The Dow and Nasdaq composite saw declines of just short of 10 percent at that time.

But the Federal Reserve stepped in shortly after, injecting billions into the banking system to loosen up the frozen credit markets, cutting the discount bank lending rate, and ultimately cutting the fed funds rate, which affects consumer loans.

That sparked a broad rally leading through October, when the major gauges peaked again. On Oct. 9, the Dow and S&P 500 ended at all-time highs, while the Nasdaq hit an almost 7-year high on Oct. 31.

Stocks have been sliding since then, as Wall Street pros have cashed out after the rally, and as analysts and investors have begun to worry that the Fed is behind the curve and a recession could be underway.

As of Monday's close, the Dow is down 10 percent from its October high and the S&P 500 is down 10.1 percent. The Nasdaq is off 11.1 percent.

A correction could spell the start of a bigger downturn, or it could prove to be the impetus to bring wary traders back in, starting another wave up.

Ghriskey said he thinks the current "correction" is worse than the one over the summer, and that there is little to suggest a change in direction any time soon.

Early reports on Black Friday and the weekend showed a strong turnout of shoppers, although no big splurgers. Investors were also tracking Cyber Monday results. But the upbeat early signs about consumer spending failed to distract Wall Street from the broader worries.

Tuesday kicks off a big week for economic news, with reports due on consumer confidence, existing home sales, and personal income and spending, among other things.

While those reports are important, investors will especially be looking to the November employment report due the following week and the upcoming Fed meeting, said Ron Kiddoo, chief investment officer at Cozad Asset Management.

The Fed's last scheduled policy meeting of the year is on Dec. 11 and many market watchers are betting that the central bankers will choose to cut the fed funds rate again, to help temper the speed of the economic slowdown.

The fed funds rate currently stands at 4.5 percent. Fed watchers are split about whether the bank will cut the rate by a quarter or half percentage point, or possibly not at all.

On Monday, the Fed's New York branch said it will offer a series of special short-term loans to make sure banks have enough cash available.

Among other stock movers, E*Trade Financial (Charts) slipped in active Nasdaq trade after a Wall Street Journal article said that any potential buyout could be delayed by concerns about its weakened mortgage portfolio. On Friday, E*Trade shares jumped on buyout talk.

Citigroup lowered its near-term outlook on the homebuilders, saying it is hard to see when the bottom will be made for the hard-hit industry. Centex (Charts, Fortune 500), Lennar (Charts, Fortune 500) and KB Home (Charts, Fortune 500) were among the names cited in the report.

On the upside, Dow component Boeing (Charts, Fortune 500) inched higher after Wachovia upgraded the jet maker to "outperform" from "market perform," according to Briefing.com.

But it was one of the few Dow gainers, with 28 out of 30 blue chip stocks falling.

All financial markets were closed Thursday for Thanksgiving, and closed early Friday, with many Wall Streeters making a four-day weekend of it.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by over three to one on volume of 1.50 billion shares. On the Nasdaq, decliners beat advancers by seven to three on volume of 2,01 billion shares.

Treasury prices jumped, lowering the yield on the benchmark 10-year note to 3.83 percent - the lowest level since June 2005 - from 4 percent late Friday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar dipped versus the euro, but held above the all-time low hit on Friday. The greenback fell versus the yen.

U.S. light crude oil for January delivery fell 48 cents to settle at $97.70 on the New York Mercantile Exchange, erasing earlier gains.

COMEX gold for December delivery settled at $826.50 an ounce, down from Friday's close.