After a Bright, Sunny Morning, Afternoon Clouds Ruin Wall Street's Day

Yes, it was a breakdown, and it's not alright. After several hours of what looked like a respectable day of rotation into tech, bad news out of the brokerage stocks increased the pain in an already-reeling Dow Jones Industrial Average, and the rest of the market succumbed during the last two hours of trading.

Major Indices INDEX CHANGE % VALUE YR TO DATE Dow -211.43 -2.01% 10,323.92 -10.2% S&P 500 -17.53 -1.25% 1381.52 -6.0% Nasdaq -65.26 -2.00% 3205.35 -21.2% Russell 2000 -5.58 -1.21% 456.16 -9.6% TSC Internet -24.48 -3.17% 746.77 -35.3% TSC New Tech 30 -84.82 -16.65% 424.57 -31.2% NOTE CHANGE PRICE YIELD 10-Year Treasury 18/32 101 23/32 6.398%

Through most of the morning and early afternoon, the Nasdaq Composite Index was supported by buying in big-cap technology stocks, as investors rotated out of cyclical stocks, commodity-related names and transports.

But afternoon reports that Goldman Sachs (GS Quote) is likely to miss second-quarter earnings estimates changed the market's fortune. Goldman dropped fast, and took the rest of the struggling sector with it.

One by one, the major indices were pulled underwater, beginning with the S&P 500, and then the Comp. The S&P 500 finished down 17.53, or 1.25%, to 1381.52; the Comp fell 65.26, or 2%, to 3205.35, and the Dow Jones Industrial Average fell 211.43, or 2%, to 10,323.92.

"When you see a bellwether like Goldman Sachs saying 'we're going to miss,' the next thing you know, people cancel their bids and everything," said Peter Blatchford, trader at Miller Tabak. "The market's in a fragile state and that exemplified it."

Brokerages figure to show diminished earnings in the second quarter due to diminished trading volume, rising interest rates, fewer initial public offerings and falling equities. A research report by Merrill Lynch stated that Goldman would probably earn between $1.30-$1.35 a share for the second quarter, well off the First Call consensus estimate for $1.47 a share. Goldman finished down 7, or 8.75%, to 73. Compatriots Merrill Lynch (MER Quote), down 5.8%; J.P. Morgan (JPM Quote), off 2.7% and Lehman Brothers (LEH Quote) down 6.7%, all fell off late after being up most of the day.

Big-cap technology stocks displayed strength for the bulk of the day after taking a beating for the better part of the week. Among the most heavily traded were Cisco (CSCO Quote), which stayed in positive territory most of the day before falling into the red, losing 5/8 to 54 1/2 on 75.5 million shares. Sun Microsystems (SUNW Quote) was sold in a flash near the end of the day, dropping 3 1/2 to 72 7/8.

That the brokerage stocks were able to plunge the Dow into the abyss isn't a stretch. That the sector's weakness bled into the technology sector is of greater concern; and a demonstration that the market's proclivity to psyche itself into imploding is still alive.

"We need to change the perception that the Fed is going to have an open-ended series of hikes, and we can't shake it," said Barry Hyman, chief market strategist at Ehrenkrantz King Nussbaum. "It's still difficult to make the case for a blue-chip, broad market rally. We need to get something good."

That 'good' may be next week's economic data, including the purchasing managers' index and the May employment report. After an orderly, restrained reaction to the Federal Reserve's 50-basis-point hike last week, the market is taking a dire view of the future -- that the Fed is going to hike, and hike, and hike, until it stops the economy dead.

Some, including Hyman, don't see it that way. But he doesn't seem able to assuage the greater market, because the psychology so violently differs from the good times felt until March. Until there's evidence to support the relaxing of tensions, the market may continue to suffer.

"We're adjusting to a stiff jolt in interest rates," said Paul Rabbitt, president of Rabbittanalytics.com, who believes the "light is at the end of the tunnel" as far as the Fed is concerned.

Would that the market believed that. Among widely traded stocks, Oracle (ORCL Quote) was one of the few to remain in positive territory, gaining 2 3/16 to 66 7/16. Major technology indices were bruised by day's end, with the Philadelphia Stock Exchange Semiconductor Index dropping 1.5% and the Morgan Stanley High-Tech 35 off 1.3%.

"Now, we're finding resistance to wanting to own Cisco or any other technology stocks, and that's a dramatic sentiment shift," said Hyman.

After a strong day yesterday, the Dow Jones Transportation Average was considerably weakened, off by 3.9% to 2717.77, led down by airline stocks, which continued to decline after yesterday's news of a possible merger between UAL (UAL Quote) and US Airways (U Quote). UAL finished down 8%, and U.S. Airways lost 3/8 to 52 1/2.

Commodity-related stocks and cyclical plays were weaker today, as investors moved to prop up flagging technology stocks. The Morgan Stanley Cyclical Index fell 2.5% today, and the S&P Chemical Index was down 4%. Dow Chemical (DOW Quote) lost 7, or 6.2%, to 105 1/4, and Caterpillar (CAT Quote) lost 4%. The Dow Jones Utilities Average fell 0.2%.

Small- and mid-cap stocks were weaker today, as the Russell 2000 dropped 5.58, or 1.2%, to 456.16, and the S&P MidCap 400 fell 0.8%. TheStreet.com Internet Sector index wasn't immune to the selling, dropping 24.48, or 3.2%, to 746.77.

Today's most important economic release, the first revision to first quarter Gross Domestic Product, was a non-event. GDP was unchanged at 5.4%. It will be revised again, at the end of next month. The 10-year Treasury note rose 18/32 to 101 23/32, yielding 6.398%.

Market Internals

Breadth was poor on moderate volume.

New York Stock Exchange: 1,261 advancers, 1,607 decliners, 976 million shares. 33 new highs, 74 new lows.

Nasdaq Stock Market: 1,729 advancers, 2,264 decliners, 1.54 million shares. 37 new highs, 177 new lows.