Psychology Sours, Stocks Sink

Still, investors came back from the holiday weekend to find the dollar had slid past the psychologically important $1.30 mark vs. the euro, which revived concerns about foreign investment in U.S. assets. The dollar ended the day marginally stronger than it did Wednesday against the euro and the Japanese yen. After trading as high as $1.324 intraday, the euro dropped 0.2% on the day to $1.313, while the dollar rose 0.5% to 116.08 yen.

Despite worries about foreigners' waning interest in Treasuries, they rallied as stocks fell. The 30-year Treasury bond jumped 10/32 to yield 4.61%; the 10-year note gained 5/32 to yield 4.53%. The two-year note added 1/32 to yield 4.72%.

Stocks were set up for this drop, according to technicians. While the confounding overbought condition persisted for months, the S&P 500's recent push to 1400 and beyond showed signs of weakness, including lower highs for the momentum indicator, writes John Roque, technical analyst at Natexis Bleichroeder.

"The market was extended or overbought enough to believe that a corrective phase should have occurred or should occur," Roque says, stopping short of predicting how deep or how far the market may decline.

The price of oil climbing past the psychologically important $60 per barrel mark added to the pile of negatives Monday. Oil rose 1.84% to close at $60.33 per barrel.