Today's Market: Stocks Close Down as Bearish Heads Prevail

Another ugly session wrapped up on the Street, with major equity indices tumbling after yesterday's massive rally that saw the third-largest percentage gain in history on the Nasdaq Composite Index and the second-largest point gain for the Dow Jones Industrial Average .

Today's selloff was in part a payback from yesterday and was also motivated by a number of earnings warnings and a weaker-than-expected jobs report. The market made a couple of attempts to rally in the midafternoon, but investors weren't having any, attacking the rallies and selling them aggressively. Breadth was putrid, with more than double the number of stocks ending lower than higher.

The Dow gained 400 points yesterday while the Nasdaq rose 9%, and Tony Dwyer, market strategist at Kirlin Holdings, noted that action like yesterday's is almost asking for a selloff. Meager gains are something to build on, he said, but ridiculously volatile rallies are almost always opportunities to sell.

"You're going to have a pullback," he said. "That all happened in one day, which is typical of a bear market countertrend rally."

The Dow gave up 127 points to finish at 9791.09, down 1.3%; the S&P 500 lost 22.85 to 1128.59, down 2%, and the Comp dropped 65 to 1720, down 3.6%.

Volume was lackluster again, with just 1.25 billion shares changing hands on the New York Stock Exchange and 1.72 billion traded on the Nasdaq Stock Market.

Investors pounced on earnings warnings from the likes of optical-networker Sycamore Networks(SCMR Quote), switchmaker Extreme Networks(EXTR Quote), as well as a downgrade of Motorola (MOT Quote) by Credit Suisse First Boston.

The cell-phone maker was one of the day's worst performers, losing 23% of its value on a total of 63.5 million shares traded, making it the most active on the Big Board. It closed at $11.50, its lowest level in eight years. Motorola, expected to report a loss of 7 cents a share for the first quarter when it reports earnings next week, issued a statement saying it was not facing liquidity problems and would not have trouble handling its debt obligations.

Telecommunications companies were especially hard-hit today, as Lucent Technologies (LU Quote) dropped 12% and Nortel Networks (NT Quote) lost 5.4%. Extreme lost 0.3% and Sycamore ended down 20%.

Just a few of the most defensive sectors, those regarded as safer among stocks, ended on the upside, including gold, drugs and tobacco, as well as biotechnology. The poorest performers today were the semiconductors and the Internet stocks.

Following the announcement of California energy company Pacific Electric & Gas' (PCG Quote) intention to file Chapter 11, that stock was killed today. It ended down $4.18, or 37%, to $7.20, while rival California power provider Edison International (EIX Quote) lost $4.39, or 35%, to $8.25.

But I Never Could Find (Sha Na Na Na...)

Also motivating today's selling was this morning's jobs report, which turned out worse than expected. It displayed broad signs of softening in the labor market, with significant losses in a number of different industries.

Nonfarm payrolls fell 86,000 in March, way off of the 58,000 gain expected, and unemployment rose to 4.3% from 4.2% in February. Persistent weakness in the manufacturing sector (down 81,000) bled into the temporary-help sector in March, and the retail trade sector also lost 46,000, causing a 19,000 decline in the service-producing sector. In addition, the Labor Department's diffusion index, which tracks the number of industries laying off people, was below 50 for the second straight month, meaning there are more industries that are laying off people than are hiring people, a dangerous sign for the economy.

While the bond market rallied, as investors are more comfortable with safer assets during hard times, the stock market isn't reacting with its usual bit of "Fed rate cut" enthusiasm. The equity market has derived strength on bad economic news, extrapolating that the Federal Reserve would have to get more aggressive in cutting rates more quickly -- but the stock market has not reacted positively, an indication that it does not view economic recovery as imminent, regardless of what the Fed does.

Merrill Lynch issued a report this morning suggesting the weak employment data could spur more aggressive, intermeeting cuts by the Fed, possibly a cut of as much as 50 basis points next week.

Fed officials, in their comments, seem guarded. Obviously, more deterioration in economic reports would prompt them to act quickly, but some worry that comments like those at Merrill will end up causing the market to engage in a self-hating prophecy, rallying on the assumption of a rate cut, feeding on that rally when it doesn't get it.

"It could happen," said Phil Dow, director of equity strategy at Dain Rauscher, with regards to a rate cut. "They did say they weren't planning an intermeeting cut, but you're dealing with a long period between (policy) meetings, and they've said they're watching the numbers diligently." The Fed next meets May 15.

A rebound in financials could indicate stocks are on their way back; financial stocks don't just react to their own fundamentals, but also reflect anticipated trends in borrowing and loan activity. Indices that track the banks and insurance companies were lately adding to earlier losses, and the brokerage index was sinking further into the red.

A look at some key financial-services indices shows a rally isn't in the offing yet: the Philadelphia Stock Exchange/KBW Index ended down 3%, the S&P Insurance Index fell 2%, and the American Stock Exchange Broker/Dealer Index was down 3.4%.

The bulls say yesterday's bounce is at least an indication that the market may have successfully retested its lows and is finally beginning to build a bottom. Investors sold stocks furiously during March and the first few days of April, and some think the market can't go any lower. The Nasdaq is now 65% off its highs of last March; the S&P 500 is down 25% and the Dow is down 15%.

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