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Slaughter on Wall Street

Robert Holmes

Sellers were out in full force Tuesday as worries about the strength of the U.S. economy and weakness overseas sent stocks in New York to massive losses.

The Dow Jones Industrial Average sank 416.02 points, or 3.29%, to 12,216.24, its worst single-day pullback since the market reopened six days after the terrorist attacks of Sept. 11, 2001.

Around 3 p.m. EST, the industrials, already down more than 200 points, dropped precipitously in a matter of minutes, due in part to what appears to have been a heavy backlog of sell orders that had temporarily clogged the system. At one point, the Dow slumped 546 points before rebounding slightly.

Meanwhile, the Nasdaq Composite plunged 96.65 points, or 3.86%, to 2407.87, and the S&P 500 gave back 50.33 points, or 3.47%, to 1399.04.

Both the Dow and the S&P 500 are now in negative territory for 2007. The Nasdaq remains slightly above the unchanged mark for the year.

Because of the steepness of the losses, trading curbs went in effect on the New York Stock Exchange, where volume reached a record level.

"Normally, when circuit breakers kick in to stop us from selling, we get a bounce," said Paul Mendelsohn, chief investment strategist with Windham Financial. "However, a whole queue of sell orders hit the system. That is not a good omen when the circuit breakers don't bring us back. We dropped in a matter of minutes. This is not supposed to happen."

Nearly 4 billion shares changed hands on the NYSE, where decliners outpaced advancers by a 7-to-1 margin. On the Nasdaq, volume reached 3.13 billion shares, and losers trampled winners 14 to 1.

On the Dow, all of its 30 components finished in the red, led by 5% or greater drops in Disney (DIS Quote - Cramer on DIS - Stock Picks), General Motors (GM Quote - Cramer on GM - Stock Picks) and Procter & Gamble (PG Quote - Cramer on PG - Stock Picks).

"The market has been stretched for the last three months, and there's been lots of speculation," said Phillip Roth, chief technical market analyst with Miller Tabak. "It's been destined to crack, but no one knew which trigger would do it."

The tech-laden Nasdaq was pressured by losses in Apple (AAPL Quote - Cramer on AAPL - Stock Picks), Intel (INTC Quote - Cramer on INTC - Stock Picks), Cisco (CSCO Quote - Cramer on CSCO - Stock Picks), Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks) and Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks).

Yields on Treasuries and the dollar dropped for the session. The 10-year Treasury jumped 30/32 in price to yield 4.51%, and the 30-year bond surged 1 23/32 to yield 4.62%. The greenback extended its losses against the euro and the yen.

"Toward the end of the day, there was a flight-to-safety bid to Treasuries as the market crumbled," said John Canavan, market analyst with Stone & McCarthy Research Associates. "There's more liquidity and more safety for investors."

Before the session began, the Commerce Department said durable-goods orders dropped 7.8% in January, more than twice as wide as the expected 3% decline. Excluding transportation, orders were down 3.1% for the month.

Additionally, December's headline number was revised downward to 2.8% growth from 2.9%.

"Most believe the Federal Reserve's hands are tied, meaning that they would like to raise rates but won't risk hurting the economy to do so," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "If a rate cut is off the table, then economic weakness is negative news."

However, there was positive news elsewhere on the economic docket. First, the National Association of Realtors said existing-home sales rose 3% to 6.46 million annualized units in January, above estimates of 6.24 million. It was the largest increase in sales since January 2005.

Still, the Philadelphia Stock Exchange Housing Sector index fell 2.7%.

Also, the Conference Board said that its consumer confidence index rose to a reading of 112.5 in February, above both the January number and economists' expectations.

Meanwhile, equities were pummeled overseas. A benchmark index in mainland China sank more than 9%, while Tokyo's Nikkei dipped 0.5% to 18,120 and Hong Kong's Hang Seng slid 1.8% to 20,148.

In Europe, London's FTSE 100 dropped 2.3% to 6287, and Frankfurt's Xetra DAX surrendered 3% at 6819.

Crude oil fell as low as $60.06 a barrel before reversing. The April contract added 7 cents to close at $61.46 a barrel on the New York Mercantile Exchange, while gold eased $2.60 to $687.20 an ounce.

Among the names in the news, retail giant Target (TGT Quote - Cramer on TGT - Stock Picks) posted a fourth-quarter profit of $1.12 billion, or $1.29 a share, compared with earnings of $939 million, or $1.06 a share, in the year-ago quarter. Results beat the Thomson First Call average estimate by 2 cents. However, Target dropped $3.15, or 5%, to $59.40.

Elsewhere, a day after prospective merger partner XM Satellite Radio (XMSR Quote - Cramer on XMSR - Stock Picks) posted its results, Sirius (SIRI Quote - Cramer on SIRI - Stock Picks) reported a narrower-than-expected quarterly loss and stronger-than-forecast revenue. The company also said fiscal 2007 revenue should approach $1 billion. Sirius was off by 9 cents, or 2.4%, to finish at $3.65.

Homebuilder Hovnanian Enterprises (HOV Quote - Cramer on HOV - Stock Picks) guided above consensus estimates, something of a rarity these days for the publicly traded companies in the sector. Still, Hovnanian slid 83 cents, or 2.5%, at $32.

Turning to the research calls, UBS upgraded General Electric (GE Quote - Cramer on GE - Stock Picks) to buy from neutral, and JPMorgan downgraded NYSE Group (NYX Quote - Cramer on NYX - Stock Picks) to underweight from neutral.

GE fell by 68 cents, or 1.9%, to end at $34.66. The NYSE Group lost $5.56, or 6.2%, to $84.45.