Housing Data Swat Stocks

Wall Street closes lower after a weak report on home sales spurs concern about a soft economy.
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Updated from 4:07 p.m. EDT

Stocks finished lower Wednesday as a soft report on existing-home sales raised concerns that the economy might be more in danger of being derailed by a slowdown than by inflation.

After opening higher, the

Dow Jones Industrial Average

retreated and spent most of the day under water, closing with a loss of 41.94 points, or 0.37%, at 11,297.90. The

S&P 500

fell 5.83 points, or 0.45%, to 1292.99, and the

Nasdaq Composite

dropped 15.36 points, or 0.71%, to 2134.66.

The 10-year Treasury was down 2/32 in price and yielding 4.82%, and the dollar weakened against most major currencies.

"This feels like a calm before a storm," said Dave Briggs, head of equity trading with Federated. "The volume has been so light, and we've been only trading sideways. Some traders are anxious for September to come and end the summer doldrums. It feels like we need one more pullback to give people some bargains and get cash in."

Volume was again light, with about 1.21 billion shares changing hands on the

New York Stock Exchange

and 1.47 billion shares trading on the Nasdaq. Decliners outpaced advancers 2 to 1.

Pulling down the major averages were data from the National Association of Realtors showing that existing homes sold at a 6.33 million annual clip last month, down 4.1% from 6.62 million a month earlier. The much-anticipated report comes during a week that has seen a dearth of economic data.

"It appears that the optimism based on the Fed stopping its cycle has run its course," said Edgar Peters, chief investment officer with Pan Agora. "Now we are faced again with the prospect that a slowing economy is hurting earnings. We haven't seen any conclusive evidence that inflation is subdued."

Following the larger-than-expected decline,

KB Home

(KBH) - Get Report

fell 6.2%,

Pulte Homes

(PHM) - Get Report

dropped 3.5%,

Hovnanian

(HOV) - Get Report

sank 3.1%, and

Toll Brothers

(TOL) - Get Report

was off 2.6%.

To view Gregg Greenberg's video take on today's market, click here

.

A report on new-home sales will be released Thursday, with economists expecting sales to dip to 1.10 million annualized units in July from 1.13 million units in June.

"New-home sales are more timely and more important data than the existing-home sales we got today," said Peters. "The market has become much too optimistic about the Fed engineering a soft landing, so we'll look for further evidence in this data as well as next week, which is sure to be busy."

The reaction to the existing-home sales report highlights the difficulty traders have on an almost daily basis when placing bets on the health of the economy and the thinking of the

Federal Reserve

. Weak numbers improve the chance the Fed will feel less threatened by inflation and leave rates where they are. However, if they're too sluggish, the worry then becomes that the economy could be gearing up for a recession.

Energy futures were easing following weekly inventory data, while metals were mixed. Crude oil for October delivery, the new benchmark contract, fell $1.34 to finish at $71.76 a barrel. Gold eased $1 to $633 an ounce, and silver gained 25 cents to close at $12.51 an ounce.

The Energy Department said U.S. crude inventories fell by 600,000 barrels, less than expected, for the week ended Aug. 18. Gasoline inventories unexpectedly rose by 400,000 barrels. Distillate stocks climbed by 2.3 million barrels.

By sector, the Philadelphia Oil Service Sector Index was lower by 2.2%, and the Amex Oil Index lost 1.5%. Elsewhere, the S&P Retail Index slid 1.3%, and both the Philadelphia Semiconductor Sector Index and the Dow Jones Transportation Average were down 0.7%

Major averages in the U.S. closed essentially flat Tuesday after Chicago Fed President Michael Moskow cautioned investors that the central bank might not be done with its rate-tightening campaign.

During a speech, he said "the risk of inflation remaining too high is greater than the risk of growth being too low. Thus some additional firming of policy may yet be necessary to bring inflation back into the comfort zone within a reasonable period of time."

Earlier this month, policymakers left the fed funds target rate unchanged for the first time in more than two years.

National Semiconductor

(NSM)

cut its quarterly sales forecast late Tuesday. The chipmaker cited lower shipments for chips used in mobile phones. UBS, Piper Jaffray and Morgan Stanley lowered their price targets after the news. Still, shares rose by 79 cents, or 3.5%, to $23.37.

Fellow chipmakers

Texas Instruments

(TXN) - Get Report

and

STMicroelectronics NV

(STM) - Get Report

ended the session lower. Handset producer

Nokia

(NOK) - Get Report

was off 2%.

Medtronic

(MDT) - Get Report

fell after the medical device company posted net income of $599 million, or 51 cents a share , up 87% from a year ago. Excluding items, the company said it had EPS of 55 cents, beating the lowered Thomson First Call estimate by a penny. However, the company also cut its forecast. Medtronic finished lower by 5 cents, or 0.1%, to $45.31.

Gateway

(GTW)

was one of the best performers, surging 13.4% after the computer retailer received an unsolicited offer for its retail operations. Separately,

Joui International

owner Lap Shun Hui said he made an offer to buy the retail operations for $450 million and would also consider buying all of Gateway. The stock was higher by 23 cents to close at $1.95.

Two merger stories were in the headlines, including

Weyerhaeuser

(WY) - Get Report

and

Domtar

(DTC)

, which plan to combine their fine paper businesses in a $3.3 billion deal. Shareholders of Weyerhaeuser will own 55% of the company. Weyerhaeuser will also get a $1.35 billion payment. Domtar's investors will get 45% of the company.

Weyerhaeuser rose $1.32, or 2.2%, to $61.35. Domtar lost 16 cents, or 2.3%, to $6.71.

Elsewhere,

IBM

(IBM) - Get Report

said it would buy

Internet Security Systems

(ISSX)

for $28 a share, or $1.3 billion. The price gives Internet Security shareholders an 8% premium.

IBM closed down 28 cents, or 0.4%, to $78.67. Internet Security Systems gained $1.62, or 6.2%, to $27.62.

Equities in Europe and Asia were mostly lower. London's FTSE 100 slipped 0.7% to 5860, and Frankfurt's Xetra DAX was off 0.7% to 5775. Tokyo's Nikkei slipped 0.1% to 16,163, and Hong Kong's Hang Seng was down 0.4% to 17,088.