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Late Selloff Slams Stocks

Robert Holmes

Stocks took a late tumble Tuesday as soaring oil prices and a reminder of the tough times in the mortgage industry derailed an early rally.

After climbing as many as 138 points in the morning, the Dow Jones Industrial Average turned lower late in the afternoon, and its losses accelerated toward the close. The index fell 146.32 points, or 1.10%, to 13,211.99.

The S&P 500 dropped 18.64 points, or 1.26%, to 1455.27, and the Nasdaq Composite fell 37.01 points, or 1.43%, to 2546.27.

"The market's strong run in the morning ended when it was met with resurfacing credit worries and the price of oil," said Peter Cardillo, chief market economist with Avalon Partners. "We gave back all of yesterday's gains plus more. We're back to square one, where we continue to worry about the negatives we ignored for so long."

Weighing on the market was dire news from lender American Home Mortgage (AHM Quote), which warned that it may have to liquidate its assets as it deals with rising defaults among home buyers. The stock plunged 90% to $1.04.

"It's hard to say whether American Home Mortgage is the main problem [with the market], although it could be the first in a whole series of dominos," said Paul Mendelsohn, chief investment strategist with Windham Financial. "We're in for a very bumpy road. The financial sector [was] much lower after this news, telling us there are a lot of fears in the credit market."

Virtually every market sector finished with losses. The Philadelphia Semiconductor Sector Index fell 2.3%, the KBW Banks Index gave back 2%, the Dow Jones Transportation Average lost 1.3%, and the Nasdaq Biotech Index slipped 1.2%.

Roughly 4.01 billion shares changed hands on the New York Stock Exchange, as decliners edged out advancers by a 6-to-5 margin. Volume on the Nasdaq reached 2.36 billion shares, with losers outpacing winners 9 to 7.

Another of the factors pushing buyers out was a spike in oil prices. The September crude contract surged $1.38 to $78.21 a barrel, a record closing price.

"When we crossed through the $78-a-barrel threshold, the market came under pressure, much like it did in the past," said Mendelsohn. "The fact that the market turned negative isn't catastrophic, but it makes me nervous."

The market erased all of its gains from Monday, when bargain-hunters emerged after a big selloff last week. The Dow rose 92.84 points to 13,358.31 last time out, and the S&P 500 added 14.96 points at 1473.91. The Nasdaq advanced 21.04 points to 2583.28.

Despite topping the 14,000 level for the first time during the month, the Dow ultimately fell 1.5% for July. The S&P 500 lost 3.2%, and the Nasdaq ended down 2.2% for the month.

The market's inital momentum in the new session came amid positive earnings. Before the open, General Motors (GM Quote) posted second-quarter earnings that easily exceeded analysts' estimates. Revenue was also better than expected. After rising early in the session, the automaker's stock dipped 21 cents, or 0.6%, to close at $32.40.

On the technology side, Sun Microsystems (SUNW Quote) also had strong results, saying after the last close that it had a profit for the third quarter in a row. Shares of Sun added 21 cents, or 4.3%, to $5.10.

For Alcatel-Lucent (ALU Quote), the news wasn't nearly as good, as it reported an unexpected quarterly loss that sent its stock sliding $1.66, or 12.5%, to $11.60.

Among others reporting, Coach (COH Quote) topped fourth-quarter estimates and bumped up its fiscal 2008 guidance. Sirius (SIRI Quote) surpassed expectations on the profit line but was light on revenue. Coach dropped 5% to finish at $45.46, while Sirius rose 1.4% to $3.01.

Elsewhere, Entergy (ETR Quote) said second-quarter earnings fell 5% from a year ago and missed targets. American Electric Power (AEP Quote) came in above estimates when special items were stripped out. Entergy climbed 1.6% to $99.96, and AEP ended down 1.3% at $43.49.

Marathon Oil (MRO Quote) said that second-quarter earnings fell from a year ago but still handily beat forecasts. Valero's (VLO Quote) second-quarter profit also came in above the average estimate. Marathon Oil lost 3.2% to $55.20, and Valero declined 3% to $67.01.

There were several M&A headlines also influencing trading. Shares of Dow Jones (DJ Quote) soared 11.3% on word that News Corp. (NWS Quote) is close to finalizing an agreement for a $5 billion acquisition of the company.

Wendy's (WEN Quote) also traded higher after billionaire investor Nelson Peltz said he would be willing to purchase the company for $41 a share. Wendy's finished higher by 4% to $35.03.

As for the economic news, the Commerce Department said personal income rose 0.4% last month, unchanged from May. Personal spending was up 0.1%. Both figures were mostly in line with expectations.

Excluding food and energy, the personal consumption expenditure price index is now higher by 1.9% over the past year, down from a revised 2% in May. That number is within the Federal Reserve's so-called comfort zone range of 1% to 2%.

"As recently as February, the core deflator was up 2.5% year-over-year, so the speed of the decline has been impressive," said Ian Shepherdson, chief economist with High Frequency Economics. "Still, the Federal Reserve is yet to be convinced it is sustainable."

At 10 a.m. EDT, the University of Michigan said its consumer sentiment index for July jumped to a reading of 112.6 from a revised 105.3 the previous month. The latest reading came in well above estimates.

However, the economic docket wasn't void of disappointing data. The Chicago Purchasing Manager Index declined to 53.4 in July from 60.2 in June, coming in short of expectations. Meanwhile, the Commerce Department said construction spending fell 0.3% for June, also below consensus.

Treasury prices gained ground. The 10-year note rose 7/32 in price, yielding 4.78%, and the 30-year bond was up 14/32 in price to yield 4.93%. The dollar was falling against the world's major currencies.

Overseas, markets were mostly higher. London's FTSE gained 2.5%, and Frankfurt's DAX climbed 1.7%. Hong Kong's Hang Seng rose 2%, while Tokyo's Nikkei was off 0.2%.

The earnings parade will continue before Wednesday's open, when such names as Time Warner (TWX Quote), Kraft (KFT Quote), OfficeMax (OMX Quote) and Qwest (Q Quote) are due to report.

Electronic Arts (ERTS Quote), Starbucks (SBUX Quote) and Disney (DIS Quote) will be out with results later in the day.