Drug-Addled: Merck Warning Weighs Down Dow Industrials

The Nasdaq also dropped. Oil stocks rose after a report that U.S. forces are on high alert in the Persian Gulf.
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(Updated from 4:19 p.m. EDT)

One of the healthiest sectors of the market took ill today: Drug stocks -- not to mention the

Dow Jones Industrial Average -- turned a shade of green (not the good kind), following a profit warning from

Merck

(MRK) - Get Report

.

This morning, the drugmaker warned that slower-than-expected sales for its arthritis-fighting drug Vioxx would result in lower-than-expected second-quarter and fiscal 2001 earnings. In the wake of the announcement, shares of Merck closed down by 9% to $67.80. The Dow, which counts Merck as one of its components, fell 110.84 points, or 1.03%, to close at 10,604.59.

The

American Stock Exchange Pharmaceutical Index

, a bastion of strength on the market, fell 3.6% today; though it's up 10.7% since a recent low on March 22. Shares of

Schering-Plough

(SGP)

fell 6.5% to $37.90 on news that an FDA probe into its manufacturing processes and quality control is hurting sales.

"Pharmaceuticals is one group that has held the market together," said Ray Hawkins, vice president of trading at

J.P. Morgan

. "That they are falling apart today is a blow to confidence."

In other news today, it was reported late this afternoon that U.S. military forces in the Persian Gulf region are on their highest state of alert on the basis of a "credible" threat of attack against American military or civilian personnel. As for its effect on the market: "The news didn't give people much reason to hold positions," said Hawkins. "But most of the selling was done this morning."

Oil stocks, however, ticked higher on the news. The

American Stock Exchange Oil & Gas Index

was up 1.1%, while the

Chicago Board of Options Exchange Oil Index

had advanced 1%. They were both trading below the flatline earlier today. Crude oil gained 34 cents a barrel, or 1.3%, to close at $26.90.

The

Nasdaq Composite fell 23.9 points, or 1.2%, to 2034.8, under pressure from a profit warning by Internet securities firm

Symantec

(SYMC) - Get Report

. The Comp had been up over the past three days, but earnings warnings are keeping a collar on tech stocks. The

S&P 500 dropped 11.7 points, or 0.95%, to 1225.35.

For the week, the major indices ended basically flat. The Dow was down 0.18%; The Nasdaq was up 0.32%; The S&P was ahead 0.91%.

Over the past few sessions, stocks have traded on the growing expectation the

Federal Reserve will again cut interest rates when it meets next week. Currently,

fed fund futures, a good proxy for monetary policy, are pricing in 100% odds for a 25 basis-point cut and 44% odds of a 50 basis-point cut.

Financial stocks, which led the market higher yesterday, however, slipped today. Analysts said the movement was a result of profit-taking. Michael Driscoll, director of listed trading at

Credit Suisse First Boston

, said next week's expected rate cut gives the market support, "but bad earnings news has people concerned." For his part, Driscoll expects a 50 basis-point cut.

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Market Internals

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International

European markets were mixed, with strength in bank stocks. The

FTSE 100

inched up 24.3 to 5665.7, and the Paris

CAC-40

rose 48.7 to 5183.7. Frankfurt's

Xetra Dax

gained 15.4 points to 5941.8 after an influential business survey showed that German business confidence fell to a two-year low in May with little prospect of recovery for Europe's biggest economy.

The euro was lately trading lower at $0.8571. The greenback was higher to 124.45 yen.

Asian markets closed mixed overnight. Tokyo's

Nikkei 225

closed up 82.18, or 0.63%, to 13,044.61. But Japanese bank stocks remained weak amid concerns about loan quality. Hong Kong's

Hang Seng

fell 13.43, or 0.10%, to 13174.02.

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