Stocks slump on bank woes
Wall Street retreats further into bear territory, with the Dow and S&P 500 hitting nearly 2-year lows, on financial sector worries and a weak dollar.
NEW YORK (CNNMoney.com) -- Stocks tanked Wednesday, with the Dow losing 237 points, as more worries about Freddie Mac and Fannie Mae's ability to raise capital exacerbated credit market and corporate profit jitters.
The Dow Jones industrial average (INDU) lost 237 points, or 2.1%, ending at the lowest point since August 2006. The Standard & Poor's 500 (SPX) index lost 2.3% and closed at its lowest point since July 2006. The tech-heavy Nasdaq composite (COMP) lost 2.6%, ending at its lowest point since March.
Stocks were mixed in the morning as Alcoa's better-than-expected quarterly report was countered by a rise in oil prices. But the tone turned negative as the session wore on, with investors dumping shares of financial services and technology stocks, one day after a big rally.
"It's another bad day," said Timothy Ghriskey, chief investment officer at Solaris Asset Management.
Ghriskey said that rumors were circulating in the afternoon that a big mutual fund was shopping 25 million shares of Freddie Mac, underscoring the level of fear surrounding the solvency of Freddie and Fannie Mae.
Shares of Freddie Mac plunged another 24%, while fellow government lender Fannie Mae lost 13%.
Stocks had surged Tuesday on lower oil prices and talk that the Federal Reserve will give banks more time to access emergency funds. But the rally proved unsustainable with the major gauges falling further into bear market territory - defined as a drop of at least 20% off the cyclical highs.
The Dow has been in a bear market for the last week, the Nasdaq since January and the S&P finally closed Wednesday with declines of more than 20% off the October highs.
"We've set new lows for this cycle, which is surprising," he said. "I don't want to say that all bets are off, because historically the time to buy is at the point of most pain, but I can't see how we could end the year with gains."
Traders are also trying to brace for the brunt of the quarterly results reporting period, which picks up speed next week, said Fred Dickson, chief market strategist at D.A. Davidson & Co.
"Traders breathed a sigh of relief after Alcoa's earnings, but there is a perception that this is going to be a weak earnings period," Dickson said.
He said that much of last month's selloff reflected the market factoring in weak second-quarter results and lowered forecasts for the third and fourth quarters.
But because most of the wringing out seems to have been done, and expectations have been lowered, selling should be limited over the next few weeks, said Dickson.
"We will continue to see companies miss estimates and the stocks get hammered, but for the most part we'll probably see companies skim across a lowered bar," he said.
The dollar slumped versus other major currencies after comments from the European Central Bank's (ECB's) president indicated that interest rates are set to rise. Bond prices rose, lowering the corresponding yields, as investors sought safety in government debt.
Stock movers: Financial services stocks fell, with the Philadelphia Bank sector index losing 5.7% and the Amex Securities Broker/Dealer index falling over 6%.
Dow financial components AIG (AIG, Fortune 500), American Express (AXP, Fortune 500), Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500) all tumbled. Merrill Lynch (MER, Fortune 500) slipped after Fitch put the company's long-term credit default rating on watch for a potential downgrade.
Among other movers, technology shares were weak. Cisco Systems (CSCO, Fortune 500) fell 5.7% after two bearish analyst notes, according to published reports.
RBC Capital Markets analysts cut Cisco's price target to $27 from $29, saying the company sees a tech spending recovery happening later than initially thought. UBS said Cisco could be looking at tough sales in the United States and Europe.
Other big techs, including Intel (INTC, Fortune 500), IBM (IBM, Fortune 500), Applied Materials (AMAT, Fortune 500) and Dell (DELL, Fortune 500), slipped too, as investors backed out after the previous session's runup.
Northwest Airlines (NWA, Fortune 500) said it's cutting 2,500 jobs, or 7% of its workforce, as well as charging for checked bags and boosting other fees. Northwest, like the rest of the airline sector, is struggling with the spike in fuel prices. Shares fell 15.7, reflecting a broadly weak airline and transportation sector%.
The Dow Jones Transportation average, which included airlines, railroads and truckers, lost 2.4%.
Market breadth was negative. On the New York Stock Exchange, losers topped winners two to one on volume of 1.49 billion shares. On the Nasdaq, decliners topped advancers by nearly five to two on volume of 2.31 billion shares.
Earnings: As is usually the case, Alcoa began the second-quarter results reporting period for Dow components.
Late Tuesday, the aluminum producer reported weaker earnings of 66 cents per share on lower sales of $7.6 billion, reflecting the impact of higher costs. Results, however, topped analysts' expectations. Alcoa (AA, Fortune 500) shares fell Wednesday.
Arris Group (ARRS) slumped over 17% after it said second-quarter sales won't meet estimates and earnings will come in at or near the low end of its previous forecast. The communications technology company cited weaker sales of voice-enabled cable modems.
On the upside, QLogic (QLGC) boosted its fiscal first-quarter sales and earnings outlook, sending shares of the maker of gear for data storage networks up 8.5%.
Dow component General Electric (GE, Fortune 500) reports quarterly results later this week, while the bulk of quarterly numbers are due out later in the month.
Fuel prices: Oil prices seesawed in the afternoon, with U.S. light crude oil for August delivery settling up a penny at $136.05 a barrel on the New York Mercantile Exchange. (Full story).
Crude prices had jumped in the morning on reports that Iran test-fired ballistic missiles, which revived worries that unrest in the Middle East could disrupt oil supplies. But prices swayed after the government's weekly report showed crude stockpiles fell more than expected and gasoline supplies were larger than forecast last week. Crude prices had fallen more than $9 over the last two sessions.
The national average price for a gallon of regular unleaded gas held steady at a record $4.108 for a third day, according to AAA. (Full story).
Other markets: In currency trading, the dollar fell versus the euro and yen after ECB president Jean-Claude Trichet's hawkish comments about inflation to the European parliament. The remarks reinforced the idea that the ECB will raise interest rates again following its hike last week.
In the bond market, Treasury prices fell, raising the yield on the benchmark 10-year note to 3.95% from 3.88% late Tuesday. Treasury prices and yields move in opposite directions.
COMEX gold for August delivery rose $5.30 to settle at $928.60 an ounce. 
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