Stocks Take Another Blow

This time, a rout in commodity stocks leads the market lower.
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Updated from 4:08 p.m. EDT

Stocks were hammered for a second straight session Friday, as big declines in commodity and energy shares stripped the market of its recent leadership and interest rates held at four-year highs.

The

Nasdaq

, which lost 2% in the previous session, fell another 28.92 points, or 1.27%, to 2243.78. The

Dow Jones Industrial Average

lost 119.74 points, or 1.04%, to 11,380.99, while the

S&P 500

shed 14.68 points, or 1.12%, to 1291.24. It was the worst two-day decline for the averages since January.

"The market realized there is more to be had with the

Fed's

rate increases," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "There was a lot of selling, and we saw no leadership. People fled positions that have done well, and they used this as an opportunity to get out of overvalued positions."

The Dow, which on Wednesday was 80 points away from its all-time high, lost 196 points, or 1.7%, for the week. The S&P 500 fell 34.5 points, or 2.6%, and the Nasdaq gave up 99 points, or 4.2%.

Friday marked the first time the Dow posted consecutive triple-digit losses since last June.

"More important than that is the fact that we've gone through key support levels," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "Each of the three major indices has breached important levels. They look like they're caving in, but than again, we haven't had a major correction since October."

As was the case Thursday, trading volume was higher than usual. About 1.85 billion shares changed hands on the

New York Stock Exchange

, with decliners beating advancers by a 4-to-1 margin. Volume on the Nasdaq was 2.32 billion, with decliners outpacing advancers 3 to 1.

"The big institutions made the most of the advance/decline line, as opposed to just the smaller traders," said Hyman. "That's concerning, because the next logical question is what will bring these institutions back. It's going to depend on upcoming economic reports, the bond yields and commodity prices."

The 10-year Treasury bond fell 15/32 in price, putting the yield near a four-year high at 5.19%. The dollar fell to an eight-month low against the yen and a year low against the euro.

Gold reversed earlier gains, giving up $8.20 to close at $711.80 an ounce, while oil, which is up 5% in three sessions, fell $1.28 to close at $72.04 a barrel in Nymex floor trading.

By sector, the Amex Gold Bugs index tumbled 4.8% and the Philadelphia Gold and Silver index lost 4%. The Amex Airline index was off 2.1%, the S&P Retail index closed down 1.8%, and the Philadelphia Housing Sector index dropped 1.4%.

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

.

The dollar remained lower after the Commerce Department said that the U.S. trade deficit shrank to $62.0 billion in March from $65.7 billion the previous month. Economists had expected the deficit to swell to $66.9 billion. Elsewhere, the Labor Department said that import prices rose 2.1% in April, more than expected.

"The trend in the deficit has stabilized but it is not falling," Ian Shepherdson, chief economist with High Frequency Economics. "The drop in the petroleum deficit is a surprise but cannot last. With oil above $70, expect an incremental $6 billion or so on the headline deficit by July."

Stocks took a further hit after the University of Michigan said its U.S. consumer sentiment index dropped to a reading of 79.0 in May from 87.4 in April. It was at the lowest level since October. Economists had expected a slight decrease to a reading of 86.4.

U.S. markets had their worst day in four months Thursday, as rallies in gold and energy markets convinced traders that the

Federal Reserve

has more work to do in reining in prices. On Wednesday, the Fed said "some further policy firming may yet be needed" in coming months to address inflation.

For Thursday's session, the Dow plunged 142 points, or 1.2%, to 11,500, while the S&P 500 fell 17 points, or 1.3%, to 1306. The Dow, which had been threatening an all-time high on Tuesday and Wednesday, moved more than 220 points below that mark, which was set in January 2000.

The Nasdaq Composite, stung by a 10% hammering in

JDSU

(JDSU)

, tumbled 48 points, or 2.1%, to 2273.

"The Fed said that they would like to stop raising rates, but could not promise anything at the moment," said Ken Tower, chief market strategist with CyberTrader. "This was a disappointment to many and brought investor focus to the negative factors -- rising oil prices, falling dollar and rising interest rates -- that they had been ignoring for months."

The weakness lingered into overseas sessions. London's FTSE was down 1.6% to 5943, while Germany's Xetra DAX fell 1.8% to 5943. In Asia, Japan's Nikkei also fell 1.5% overnight to 16,602, while Hong Kong's Hang Seng fell 1.4% to 16,902.

In corporate news,

Yahoo!

(YHOO)

CEO Terry Semel says his company

rebuffed an overture from

Microsoft

(MSFT) - Get Report

to buy a stake in the search firm. Semel says the prospect of an outright takeover of Yahoo! "never came up" in the companies' discussions.

Yahoo! fell 18 cents, or 0.6%, to $30.81. Microsoft was off 5 cents, or 0.2%, to close at $23.17.

The Dow received limited support after KeyBanc upgraded

General Motors

(GM) - Get Report

to buy from hold. The firm believes that the company will negotiate successfully with the United Auto Workers and

Delphi

(DPHIQ)

. GM added 28 cents, or 1.1%, to $26.09.

In earnings,

Nvidia's

(NVDA) - Get Report

first-quarter profit rose 41%, boosted by strong demand for its graphics chips in computers, televisions and game consoles. Adjusted earnings of 29 cents a share were a penny ahead of estimates. Still, shares fell $2.14, or 7.5%, to $26.33.

Expedia

(EXPE) - Get Report

said first-quarter profits fell 51% to $23.3 million, or 6 cents a share, while adjusted net of 15 cents were 7 cents light. The company spent more to build growth but didn't collect enough offsetting revenue. Expedia dropped 26.2%, down $5.15 to close at $14.51.

Kohl's

(KSS) - Get Report

reported a stronger-than-expected 34% rise in first-quarter earnings, to $167.2 million, or 48 cents a share. Sales at the department store operator rose 7% to $3.18 billion, also topping estimates. Kohl's guided its year in line. Kohl's gave up 20 cents, or 0.4%, to $56.65.