Even those skeptical about

yesterday's advance were taken aback at just how quickly the gains evaporated. Clearly, those giddy with excitement yesterday and early today tasted bitter disappointment, yet again.

Once as high as 9413.08, the

Dow Jones Industrial Average

closed down 1.7% to 9126.82. Similarly, the

S&P 500

shed 1.7% to 976.14, its lowest close since Sept. 21, after trading as high as 1005.88. The

Nasdaq Composite

closed down 2.5% to 1424.01 vs. its intraday best of 1475.58. The Comp's close is also its lowest since Sept. 21, which it finished at 1423.19.

While the losses for major averages were not minor, more damaging was the psychological effect of the market's inability to hold its early gains.

"I think it's disappointing we can't sustain a rally, it fits the pattern we've been getting comfortable with for the past five months," said Timothy Heekin, director of equity trading for Thomas Weisel Partners in San Francisco. The market "didn't do anything it hasn't been doing consistently: You put in what looks like a decent low and have rallies that only last for one or two days."

The equity market is going to be unable to produce anything more than short-term rallies (if that) without an improvement in fundamentals, specifically corporate earnings, and psychology, Heekin said. Specifically, "people have to become more comfortable with terrorism

threats and domestic accounting."

Certainly, nothing that occurred today suggests we're anywhere closer to that point, and some observers believe fears of additional terrorist attacks will remain particularly acute until after the July 4 holiday passes.

Once again, stocks traded in lockstep with the dollar, which rallied early before tumbling in the afternoon. The euro closed near its high of the day at 97.83 cents while the dollar closed at 121.34 yen, down from 121.69 yesterday.

Weakness in equities did benefit Treasury securities, which pared early losses. The benchmark 10-year note closed up 3/32 to 100 14/43, its yield edging down to 4.81%. Curiously, gold was unable to capitalize on the latest slide in stocks and the greenback, although it recovered some ground late in the session. Gold futures closed down 1.3% to $320.50 while the Philadelphia Stock Exchange Gold & Silver Index fell 0.6% to 77.87 vs. its intraday low of 75.42.

In fact, there was seemingly little working today from the long side, other than deep cyclical stocks such as

DuPont

(DD) - Get Report

-- which raised its second-quarter earnings guidance -- and energy names, which benefited from a one-month high in crude prices.

Recent defensive standouts such as

Philip Morris

(MO) - Get Report

and

Krispy Kreme Doughnuts

(KKD)

suffered for a second-straight session. Meanwhile,

Fedex

(FDX) - Get Report

lost 14% after saying its fiscal first-quarter results will fall shy of analysts estimates.

Even homebuilding shares declined despite a smaller-than-expected decline in existing home sales, which fell 0.3% in May to a 5.75 million annualized rate. On a year-over-year basis, existing home sales were up 6.5%. Elsewhere,

KB Homes

(KBH) - Get Report

reported second-quarter earnings that far exceeded consensus expectations and raised its estimates for the third quarter; still, KB Homes shares fell 4.1% to $50.49 after reaching a 52-week high of $54.39 early in the session.

The S&P Homebuilding Index fell 3.8% today but "you've got phenomenal demographics underlying housing," according to Dwight Anderson, who manages the over $700 million Ospraie Fund for Tudor Investments. "This is a good medium-to-long-term story as long as there's no excessive supply."

Homebuilding skeptics overlook the free cash flow being generated by the industry, as well as industry consolidation, Anderson submitted. "The industry will collapse when inventory gets too high relative to demand

which could happen if demand falls out of bed or supply gets built up," he said. But neither of those conditions exist currently; the inventory of existing homes fell to 4.5 months in May vs. 4.8 in April. Separately, the Conference Board's consumer confidence index fell to 106.4 in June from 110.3 in May, but that drop was less than expected.

Ospraie has long positions in

Lennar

(LEN) - Get Report

and

Beazer Homes

(BZH) - Get Report

.

Skeptics Warming Up

Interestingly, Anderson said his fund -- which was up 11% year to date heading into today -- is "getting longer because the fall in the stock market has created some interesting values." Moreover, as opposed to when we spoke in

early April, he is getting long more U.S.-based equities, although his macro call is for "positive but weak" economic growth.

"I think the market is wavering between manic optimism and depression," Anderson said. "The optimism in March was wrong, and the depression now is overstated for selected names where there's value."

Among names where he sees value (and Ospraie is long) are

Alcoa

(AA) - Get Report

,

Dean Foods

(DF) - Get Report

,

Kinder Morgan

(KMI) - Get Report

, and

Kerr McGee

(KMG)

.

Similar to Anderson, a great number of market participants were starting to get more optimistic about U.S. equities heading into this week. And I'm not talking about the permabulls.

"We are now sufficiently oversold to consider that a bottom will be put into place," Alan Newman, the notoriously bearish editor of H.D. Brous & Co.'s

CrossCurrents

, wrote yesterday. "We would look for an increased probability now of modest progress over the next three weeks, but the bear market is far from over."

Separately, Jeffery Saut, the Raymond James chief equity strategist, yesterday wrote: "We think we are at, or near, another trading 'buy point'" in tech/telecom type names.

Saut, who

steadfastly refused to join the 'bottom' callers in recent weeks, suggested it'd be preferable to get a "plunge-type hour in which to buy," although he was unavailable today to comment whether this afternoon qualified.

Barring that plunge, "aggressive types may buy the trashed tech of your choice with a protective July put option as an insurance package

against a trading low followed by the fabled summer rally," he wrote, suggesting

AOL Time Warner

(AOL)

"looks as good as any."

Nevertheless, the "fabled summer rally" scenario is seemingly becoming more the stuff of fable by the day.

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.