Stocks Bow to Bad News; Dow Slides 5%

Update from 3:53 p.m. EST

Stocks on Wall Street took a severe pummeling and closed with heavy losses Thursday, as economic data releases pointed to a prolonged downturn and companies reported job cuts, weak earnings and flagging sales.

The Dow Jones Industrial Average sank 443.48 points, or 4.9%, to 8695.79, and the S&P 500 gave back 47.89 points, or 5%, to 904.88. The Nasdaq shed 72.94 points, or 4.3%, to 1608.70.

In rising off its Oct. 27 lows, the market went from an oversold level to overbought in a very short period, said Robert Pavlik, chief investment officer at Oaktree Asset Management. "It's working off some of that overbought condition," he said. The market has overreacted to a thawing credit market, he said. "I still think there's weakness ahead that just hasn't been factored in."

Pavlik also said that the market has been trading on low volume, meaning that buyers have not committed to making a stand. "I think what you're seeing now is the folks that did that recent buying from the lows of the 10th or the 27th on the hopes of catching something, some kind of major reversal are now getting out of it."

"We're still in an environment where you can't trust any rallies," said Chip Hanlon, president of Delta Global Advisors. He said that although the stock market should turn higher before the economy does, the broader economy is due to stagnate for as much as nine more months.

However, Hanlon also said that if the Obama administration proves disinclined to raise taxes in the face of a weak economy, that could provide an upside that the market is currently not expecting.