Editor's note: The following is an expanded version of a column originally published Wednesday evening.

SAN FRANCISCO -- The weight of great expectations proved too much for the market to carry Wednesday. The resulting tumble left the

Dow Jones Industrial Average

at its lowest level since late November and erased the

Nasdaq Composite's

year-to-date gains.

On Wednesday evening, equity futures were higher following another batch of better-than-expected quarterly results from companies such as

Advanced Micro Devices

(AMD) - Get Report




, and




Whether that upbeat tone extends into Thursday's session remains to be seen, and will at least be partially determined by the reaction of overseas markets to Wall Street's drubbing. Quite possibly, U.S. stock proxies could rally short term based on the fact they have been under pressure for the better part of a week now.

Richard Arms reportedly commented Wednesday that the Arms Index he founded is the most oversold it has been since September. (The Arms Index measures the ratio of advancing issues to declining issues by the ratio of advancing volume to declining volume. The index rises and falls depending on whether volume is heavier in advancing stocks or declining issues. The index is often used as a measure of sentiment -- which is a contrarian indicator.)

But clearly the action Wednesday showed how dramatically market psychology has shifted in just the past week from one of seemingly boundless optimism to rising nervousness. As I write this Wednesday evening,


is airing a segment entitled "A Crisis of Confidence."

Ironically, there were some encouraging signs on the economic front yesterday, as business inventories fell 1% for November, while industrial production slid 0.1% in December, continuing its recent pattern of falling at an ever-slowing rate. Meanwhile, the consumer price index fell 0.2% last month, showing that headline inflation remains subdued.

Additionally, the

Federal Reserve's

beige book indicated that "while there are still indications of caution, there are also scattered reports of improvement."

But a still-muddied economic outlook proved woefully insufficient in inspiring buyers, who previously had been acting as if the recovery is already at hand. The data proved insufficient, especially when combined with


(INTC) - Get Report

capital expenditures cut,

TST Recommends

J.P. Morgan Chase's

(JPM) - Get Report

losses stemming from its



and Argentina exposure, as well as worries about potential asbestos liabilities facing Dow components


(MMM) - Get Report



(HON) - Get Report


"The market was priced for that perfect recovery that will not occur," commented Kent Engelke, capital markets strategist at Anderson & Strudwick in Richmond, Va. "Our greatest concern is that the recent volatility is a harbinger to that proverbial strike three and you are out."

Strikes one and two occurred last January and April, respectively, when stocks rallied on "interest rate/recovery euphoria only to make lower lows, as an immediate rebound did not occur," Engelke recalled. "Each time the coveted recovery does not occur, conviction levels drop, akin to the little boy who cries wolf. How will investors respond if we have that horrid

double dip recession?"

Yesterday's market activity presumably being a preview.

And the Follow

It occurred too late for the

Midday Musings Wednesday, but I spoke with Dan Niles, chip analyst at Lehman Brothers, about the implications of Intel's capital expenditures cut.

"The spending number is good

and I'm glad it's low," said Niles, who noted Intel's capital expenditures doubled from 1999 to 2001 while its revenues fell by 10%.

But "Intel has said before that capital expenditures to some degree is a reflection of their optimism about the growth rate in the future," Niles recalled.

He also noted that for all the talk about economic recovery and improvements in the PC space, Intel is forecasting gross margins will be 51% this year. "How many people are talking about huge upside in margin and they just gave a guidance flat with the fourth quarter," Niles said. "Yes, they're being conservative but it all ties back to the capex discussion

and how they feel about the future."

Lehman has done underwriting for Intel, and Niles has a market perform recommendation on the stock, although last week he recommended investors sell shares into the earnings.

That Intel's earnings beat expectations by 4 cents and the stock still fell 2.9% "tells you what expectations are baked into stocks at this point -- they're huge," the analyst said. "Obviously, things are getting better for Intel but the question is do you want to pay

about 35 times next year's earnings for it?"

That neatly surmises the dilemma facing the broader market right now.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.