Market Update: Dow Drops 1%, Nasdaq Ends Slightly Higher

Home Depot and Caterpillar drag on blue-chips. Biotech bumps lower.
By Kristen French ,

(Updated from 2:59 p.m. EDT)

Old Economy stocks were in the doghouse again today and trying to lure tech stocks in for some company.

The blue-chip

Dow Jones Industrial Average, which earlier in the session was up as much as 30 points, lost 100 points, or 1%, to finish at 10,504. The Dow was off 111 points last Friday. The broader market

S&P 500 ended 7 points lower to 1219. The tech heavy

Nasdaq, which lost ground earlier in the day, added 16 points to close at 2051.

"Old economy stocks have held up relatively well compared to Nasdaq stocks, and now there might be some uneasiness that this economic downturn is going to last longer than expected," said Peter Coolidge, managing director of trading at

Brean Murray Foster Securities

. "Old Economy names have been somewhat of a safe haven."

Without any major profit warnings to drive selling and ahead of the

Federal Reserve's interest-rate decision due Wednesday afternoon, plenty of investors decided to sit out today's session. Volume was light, and Coolidge said trading could be unpredictable as a result. "When you get quiet markets like this, sentiment can drive the market quickly one way or another," he said. "Lacking any material news from market leaders, we could drift a little lower, but if we get too low, the buyers will step back in."

Fed Focus

The market is mixed in its expectations for how much the Fed will opt to cut interest rates when it meets tomorrow and Wednesday. The

fed funds futures market -- a good proxy of what the bond market expects from the Fed -- is pricing in 100% odds of a quarter-point cut and just under 50% odds of a half-point cut.

Alan Greenspan & friends have already dropped short-term rates by 2.5 percentage points since the beginning of this year to 4% -- one of the Fed's most aggressive rate-cutting schedules in recent history.

Some traders expect the major market averages to remain range-bound this week, no matter what happens with the Fed meeting or earnings announcements. As Wall Street got more used to

dimming prospects of a fourth quarter acceleration in earnings, stocks traded sideways last week despite another spate of earnings warnings. Market pros say investors now want concrete signs there will be an economic recovery during the third quarter and an earnings rebound early next year -- but these signals may not come for another month or two.

"It could be like this for the summer," said Peter Blatchford, a trader at

Miller Tabak

. "The turnaround story keeps getting put off. Once you see real signs that the turnaround is imminent, then we'll see some excitement."

But any big disappointment from the Fed or earnings warnings could certainly slam stocks.

Following the Flows

Some investors may be shifting cash out of old economy names like

Caterpillar

(CAT) - Get Report

and into big-cap tech stocks like

Cisco

(CSCO) - Get Report

. Machinery manufacturer Caterpillar and specialty retailer

Home Depot

(HD) - Get Report

were two of the biggest drags on the Dow today.

Networker Cisco was up 4.2% to $18.25, Unix systems maker

Sun Microsystems

(SUNW) - Get Report

was rising 2.72% to $14.79 and data storage outfit

EMC

(EMC)

was gaining 6.2% to $28.07. Home Depot was off 4.9% to $48.23 after an article in

Barron's

said it may not be able to expand rapidly enough to be worth its valuation. The stock currently trades around 43 times earnings.

Compaq Computer

(CPQ)

was rising 2.4% to $13.83 on news it plans a major restructuring under which it will shift its emphasis to software and services from computer hardware.

The Wall Street Journal

cited a memo sent to employees by Compaq chief executive Michael Capellas. PC sales have been dwindling since last year and industry leaders have been aggressively cutting prices to grab market share.

Natural gas stocks, biotechnology and retail stocks were some of the weakest sectors today. The

American Stock Exchange Natural Gas Index

was falling 1.8%. The

Nasdaq Biotechnology Index

was losing 3.3%. And the

S&P Retail Index

was down 2.8%.

On the economic front,

existing home sales rose in May instead of falling, as economists had predicted. Some 5.37 million new units were sold on an annual basis through May, compared to the 5.12 million forecast for the month and the 5.20 million sold on an annual basis through April.

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