What was expected to be a sleepy, holiday-shortened week got off to a nightmarish start for those long stocks.

After trading as high as 9362.82, the

Dow Jones Industrial Average

closed down 1.4% to 9109.79. The

S&P 500

fell 2.1% to 968.64 vs. its earlier best of 994.45, while the

Nasdaq Composite

shed 4.1% to 1403.76 after trading as high as 1459.84. The Comp's close is its lowest finish since June 10, 1997, although above its Sept. 21 intraday low of 1387.06 for those looking for a (very thin) silver lining.

Today's losses suggested the gains late last week were mainly the result of quarter-end "window dressing" by mutual funds and the effects of the

Russell rebalancing. Notably, the dollar rallied despite the equity market's woe, thanks largely to a stronger-than-expected ISM report on manufacturing activity.

Steve Kim, equity derivatives analyst at Credit Suisse First Boston, said the Russell 2000's 3.2% drop vs. a 2.5% decline for the S&P SmallCap 600 was largely a result of the rebalancing. However, he suggested the bulk of today's broader selloff was a result of investors' analysis of the fundamental issues (or technicals, depending on the participant) hampering stocks, especially tech and biotech sectors. The AMEX Biotech Index fell 7.3%.


New York Stock Exchange

trading, 1.4 billion shares traded, and declining stocks bested advancers by 2 to 1. Declines led by a similar ratio in over-the-counter activity, where a hefty 2.6 billion shares traded. However,



accounted for 1.3 billion of the Nasdaq volume, setting a new record for a single stock. WorldCom got a delisting notice and was found to have been in technical default of some $4.25 billion of credit facilities; WorldCom shares fell 93% to 6 cents.

Early on, stocks rallied on news of an upside preannouncement by


(MMM) - Get Report

, which rose 3.6%, and

Northrop Grumman's

(NOC) - Get Report

agreement to acquire



for $60 a share and the assumption of $4 billion of debt. Elsewhere,

Vivendi Universal

(V) - Get Report

shares rose 4.4% on news of the ouster of CEO Jean-Marie Messier.

Given that two of Wall Street's favorite things are mergers and stock offerings (because of the hefty fees involved), the Northrop-TRW deal, ahead of tonight's expected IPO of



CIT Financial Group, provided some glad tidings early on.

However, early gains faded amid the now-rote concerns about corporate malfeasance: In addition to the latest WorldCom revelations, investigators reportedly found "no credible evidence" that Martha Stewart had a sell order on

ImClone Systems


in place before she dumped the stock. Shares of



slid 18% after the

New York Times

questioned that company's accounting.

Also weighing on stocks was concern about the

liquidity strain from the CIT deal, among other issues, in a week in which many participants are expected to be absent, given Thursday's July 4 closure and Friday's shortened session.

"When companies just sell shares and don't buy back very many of their own nor buy other companies for cash, that is obviously bearish for the stock market," Charles Biderman of TrimTabs.com commented today. "The huge success Wall Street underwriters have had in selling new offerings has kept this stock market going down."

There are 11 new offerings expected this week, totaling $7.5 billion, he observed, and that's before the 15% green-shoe overallotment, during which underwriters and some corporate insiders are allowed to sell shares.

The best thing investors can hope for is for the CIT deal or


(MRK) - Get Report

planned Medco spinoff to fare poorly, or if it "breaks the syndicate bid," Biderman argued. "If some of these deals crap out, then the underwriters might be forced to take the next two months off" rather than bringing more planned deals to market.

Perhaps the first such sign came after the close: Underwriters sold 200 million shares of CIT at $23 per share, below the expected range of $25 to $29 per and raising a less-than-expected $4.6 billion.

Other issues weighing on broader market averages included concerns about possible terrorist attacks during the upcoming holiday weekend. Finally, there's the growing acceptance among many investors that stocks remain richly valued despite the unkind history of other post-bubble periods.

True Confessions

Late last week I received an email from a dear friend who's worried about his holdings in a large-cap growth fund, which are down some 35% from five years ago. When I suggested he consider selling the fund and get into something safer, my friend replied, in sum:

But I'll lose the money I'm down.

And the light bulb flashed. My friend wasn't worried about potentially losing what he has left but about selling at a loss and risking not recouping those funds in the next "big rally." I know he's not alone. If he were, investors wouldn't have put another $4.8 billion in equity mutual funds in May, nor would year-over-year inflows be up 88%, as the Investment Company Institute reported last week.

In my subsequent email reply, I went a little postal, telling my friend about the history of financial assets following bubbles here in the 1920s and Japan in the 1980s, and how there's no law which says we


to invest in stocks.

Writing this diatribe crystallized why I believe stocks are going to be difficult -- at best -- for the remainder of the decade. Why, for example, I wrote on

Sept. 28 that "long-term investors should be wary of confusing a short-term trading rally with the start of another long-term bull run."

Or why on Feb. 15 I wrote about the

similarities between Dow 1000 and Dow 10,000, and the unpleasant implications therein for those long.

Not that there won't be opportunities to make money, but "buy and hold" isn't going to be very profitable, especially in index funds. Far more importantly, that's what legendary investors such as Warren Buffett, John Templeton, George Soros and William Gross, among others, have said.

The cover story in the current issue of


painstakingly details all this: Stock market manias ending in 1901, 1929 and 1966-68 were "followed by 15 to 20 years of horrible average annual returns."

The story describes just how unprecedented the late 1990s were, and not just because of the Comp's huge ascent: Price-to-earnings ratios peaked at 25.2 in 1901, 32.6 in 1929 and 24.1 in 1966 vs. 44.3 in 2000, meaning current valuations (of 25 to 40, depending on how they're measured) are still extremely high on a historic basis.

I sent my friend some excerpts from the story and highly recommend the piece to all. For while it's entirely possible the "stocks will suffer a long hangover" view is wrong, history suggests otherwise.

Furthermore, anecdotal evidence suggests that many investors still haven't even seriously considered the possibility, despite two-plus years of grueling losses -- today's included.

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.