Stocks get knocked back

NEW YORK (CNNMoney.com) -- Stocks slumped Wednesday as a strong dollar and questions about China's lending practices slammed commodities, one of the leaders of the recent rally.

IBM dragged on the tech sector as investors picked apart the company's outlook one day after sending the stock higher.

The Dow Jones industrial average (INDU) fell 122 points, or 1.1%, after having fallen as much as 207 points in the morning. The S&P 500 index (SPX) lost 12 points, or 1%. The Nasdaq composite (COMP) gave back 29 points, or 1.3%.

A stronger dollar pressured dollar-traded commodity prices and stocks. The sector was also hit by reports that China intends to slow the pace of lending this year in an attempt to get ahead of inflation.

"China's efforts to get their banks to lend less really hit commodities hard, because China is the marginal buyer of commodities," said David Chalupnik, head of equities at First American Funds.

Commodities were also under pressure in reaction to the dollar, which firmed up in comparison to a weak euro and in response to the surprise Republican senatorial victory in Massachusetts. (For more details, click here.)

Commodities and commodity stocks were among the big leaders of the rally over the last year and the weakness in the sector dragged on the broader market Wednesday.

IBM (IBM, Fortune 500) and the techs led stocks higher Tuesday and IBM and the techs were among the biggest drags Wednesday, as investors backtracked one day after the Dow, S&P 500 and Nasdaq ended at the highest levels since Sept. 2008.

With IBM, earnings and profit margins were good, but revenues were mostly in line with forecasts and the outlook was good not great, relative to high expectations, Chalupnik said.

"Expectations are higher after two quarters of cost-cutting fueled earnings growth, but little revenue growth," Chalupnik said. "I think the market now needs to see the revenues come in strong. Just meeting is not enough."

After the close, Starbucks (SBUX, Fortune 500) reported higher quarterly sales and earnings that topped estimates thanks largely to growth at stores open a year or more, a retail metric known as same-store sales.

IBM was one of the Dow's biggest decliners. Other big losers included Hewlett-Packard (HPQ, Fortune 500), Chevron (CVX, Fortune 500), Exxon Mobil (XOM, Fortune 500), Boeing (BA, Fortune 500), United Technologies (UTX, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500).

IBM: The tech leader reported higher quarterly sales and earnings late Tuesday that topped estimates. But investors took a "sell the news" approach and sent shares almost 3% lower Wednesday.

IBM said it earned $3.59 per share versus $3.28 a year earlier. Analysts surveyed by Thomson Reuters thought it would earn $3.47 per share. Sales inched up to $27.23 billion from $27 billion in the prior year versus forecasts for a drop to $26.96 billion.

Looking forward, IBM said it expects earnings per share of at least $11 for 2010.

After the big gains of 2009, investors want to see even stronger outlooks from companies, said Kim Caughey, senior equity analyst at Fort Pitt Capital Group.

"Investors are using IBM as a bellwether for technology when there are still pockets of opportunity within the sector," Caughey said.

Currently, S&P 500 earnings are on track to have gained over 180% from a year ago, according to the latest estimates from earnings tracker Thomson Reuters. But the strength is largely concentrated in financials and is in comparison to an abysmal fourth quarter of 2009.

"I don't expect we'll get much bad news out of the earnings because the pre-announcement period was very quiet," Caughey said. "That having been said, if you get a couple of bad announcements, you're going to see a volatile market."

Banking results: Dow component Bank of America (BAC, Fortune 500) said losses widened to $5.2 billion in the fourth quarter of last year, partly due to the bank paying back government bailout funds. BofA said the repayments shaved $4 billion off its bottom line.

The company was expected to post a loss of $3.9 billion, according to forecasts. On a per-share basis, BofA lost 60 cents versus forecasts for a loss of 52 cents. Shares were barely changed.

Morgan Stanley (MS, Fortune 500) reported its second-straight quarterly profit, one year after posting a massive loss. The financial firm said it earned $617 million for the quarter versus a loss of $11 billion a year ago. The stock fell around 1.7%.

Wells Fargo (WFC, Fortune 500) reported a surprise profit of $2.82 billion, or 8 cents a share, versus forecasts for a small loss. The bank benefited from stronger fee income, even as it repaid $25 billion in bailout money. Shares fell 1.6%.

Health care: Investors were also assessing the surprise Republican election to the Massachusetts Senate seat previously held by the late Ted Kennedy.

The upset victor could kill health care reform by ending the Democrats' filibuster-proof majority in the Senate. Additionally, House Democrats are mostly opposed to the idea of passing the Senate health care bill.

Investors may also be betting that the change in the balance of power in the Senate will mean other congressional spending programs could be cut back or set aside, which had an impact on the dollar.

Economy: Building permits, a measure of builder confidence, rose to a 653,000 unit annual rate in December from a 589,000 rate in November, the government reported. Permits were expected to rise to a 590,000 rate, according to a consensus of economists surveyed by Briefing.com.

But housing starts fell to a 557,000 unit annual rate from a 580,000 unit rate in November. Economists thought starts would fall to a 572,000 unit rate.

The Producer Price Index (PPI), a measure of wholesale inflation, rose 0.2% in December after climbing 1.8% in the previous month. Economists thought it would hold steady. The so-called core PPI, which strips out volatile food and energy prices, was flat versus forecasts for a gain of 0.1%. Core PPI rose 0.5% in the prior month.

World markets: Asian markets ended lower, with China losing 3% on the debt issue. European markets ended lower as well.

Commodities and the dollar: The dollar gained versus the euro and the yen.

COMEX gold for February delivery fell $27.40 to settle at $1,112.60 an ounce. Gold closed at an all-time high of $1,218.30 an ounce last month.

U.S. light crude oil for February delivery fell $1.87 to settle at $77.62 a barrel on the New York Mercantile Exchange.

Bonds: Treasury prices rose in a classic flight-to-quality, lowering the yield on the 10-year note to 3.65% from 3.69% late Tuesday. Treasury prices and yields move in opposite directions.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by almost three to one on volume of 1.06 billion shares. On the Nasdaq, decliners beat advancers by over two to one on volume of 2.39 billion shares.