(Updated from 3:27 p.m. EST)

For the past two weeks or so, Wall Street has been caught up in a malaise, torn between the bleakly uncertain earnings outlook and the optimism of future

Federal Reserve cuts. Volume has been pretty moderate, a sign that traders continued their Sit-out strike, waiting for clear direction.

Today was no exception, as early morning spikes in both the

Dow Jones Industrial Average and

Nasdaq Composite Index faded as the day wore on. The Dow ended off 66 to 10,881 while the Comp traded off 46 to 2562

Retailers got crushed as a mixed January sales report wasn't good enough to cheer up investors burned by a rotten Christmas. The

Gap

(GPS) - Get Report

and

AnnTaylor

(ANN)

, two mall staples, warned that future earnings wouldn't match estimates, but that was offset by good news from

Talbot's

(TLB)

and the

Limited

(LTD)

.

With the picture mixed, investors worried about the debilitating affect of discounting. The sales rack may be a good thing for shoppers, but companies make less money or even lose money by selling cheap to make room for spring fashions. Discounting can strip away excess inventory. But deep discounting can cut into profit margins. As a result of this unchecked fear, the

S&P Retail Index

dropped 4%.

It was led lower by industry heavyweight

Wal-Mart

(WMT) - Get Report

. The blue-chip retailer announced today that January same-store sales rose 6%, and that net sales rose to $16.7 billion from $14.7 billion. But despite that apparently good news, Wal-Mart took a nosedive along with the rest of the sector. It fell $2.36 to $52.30 -- the third-biggest drag on the Dow.

Home Depot

(HD) - Get Report

, was another big drag. It fell $1.79 to $43.99.

The retail selloff turned into something of a mudslide, wiping out companies that make clothing and sneakers that end up on displays.

Reebok

(RBK)

,

Nike

(NKE) - Get Report

,

Gucci

(GUC)

and

Harley-Davidson

(HDI)

choked on mud.

IBM

(IBM) - Get Report

and

Microsoft

(MSFT) - Get Report

were the two biggest Dow weights, keeping the index away from 11,000 for another session.

Technology still continued to stand dumbfounded in the wake of

Cisco's

(CSCO) - Get Report

earnings release after Tuesday's closing bell. Most sectors were within a percentage-point move of the break-even point as investors sort through the earnings season and try to spot winners. Disk drive peripherals, those companies that make the gizmos that go with the techno-stuff you already own, were the only notable winners. The

American Stock Exchange Disk Drive Index

, a collection of these names, rose 1%.

Cisco was the most-actively traded stock on the Nasdaq and continued to get kicked in the teeth. It fell 3.4% to $30, making this the second-straight day of losses and the fourth losing session in five tries. This drags Cisco within a buck of its 52-week-low of $29.88. It could have been worse. It could have been more like yesterday, where Cisco dropped 12% on 282 million shares traded. No, that's not a typo -- that's 282 million shares -- the second-most heavily traded single issue in Nasdaq history.

Other networking and networking-related names like

Juniper Networks

(JNPR) - Get Report

,

Flextronics

(FLEX) - Get Report

and

PMC-Sierra

(PMCS)

got a boost as Cisco fell.

Other Nasdaq stocks were posting healthy gains.

KPMG Consulting

(KCIN)

, the second-most active stock, began trading today and rocketed up 29.5%.

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Sector Watch

Merger mania has been sweeping the airline industry.

American Airlines

and

United Airlines

are going to pick up

Trans World Airlines

and

U.S. Airways

, forming two massive airlines.

Delta

(DAL) - Get Report

went on the record yesterday to tell the

Senate

Judiciary Committee that more mergers may need to occur to offset that consolidation of power.

AMR

(AMR)

, which owns American, dropped 4.1%.

UAL

(UAL) - Get Report

, United's parent, fell 2.5%, while Delta slid 1.7%. The

American Stock Exchange Airline Index

dropped 2.1%.

The turbulent skies rattled the

Dow Jones Transportation Average

, which dropped 0.3%. Without the airline slump, transports would have fared much better today, with

FDX

(FDX) - Get Report

up 4.1%, and

CSX

(CSX) - Get Report

up 2.4%.

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Bonds/Economy

Treasury prices are lower in thin trading. The longer-dated securities are under greater supply-side pressure as the market awaits the auction of $10 billion worth of the 30-year bond. Dealers are selling in order to drive down the auction price.

The benchmark 10-year

Treasury note lately was down 2/32 to 99 8/32, yielding 5.097%.

In economic news, the

initial jobless claims

(

definition |

chart |

source

), which tracks the number of laid-off workers applying for unemployment benefits for the first time, rose for the third consecutive week. The bond market has already priced in this trend, however. There were 361,000 claims for the period ended Feb. 3, up from 346,000 the previous week. Economists polled by

Reuters

had forecast 348,000. The four-week moving average, considered the more reliable indicator of unemployment, rose to 331,250 from 327,000.

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