Terrorism's ugly specter re-emerged Tuesday, helping send stocks lower. But despite the terrorist bombings at an airport in the Philippine city of Davao, widespread parsing of Warren Buffett's cautious comments and the resulting downturn for shares, there was a distinct absence of terror among traders.

The

Dow Jones Industrial Average

fell 1.7% to 7704.87, the

S&P 500

shed 1.5% to 821.99 and the

Nasdaq Composite

lost 0.9% to 1307.80.

General Motors

(GM) - Get Report

fell another 5.7% following Tuesday's report of declining sales, and was the biggest drag on the Dow. A lackluster outlook from

Caterpillar

(CAT) - Get Report

, which fell 4%, further weighed on the index.

Overall, the decline was more of the meandering variety as trading volume remained relatively subdued and shares dropped steadily rather than sharply, until the final hour. Although 85% of

Big Board

volume was to the downside and declining stocks led advancers nearly 2 to 1, just under 1.2 billion shares were exchanged, well below last year's daily average. Less than 1 billion shares traded over the counter, where 73% of volume was negative and losers led 19 to 12.

"This market is horrible and people are still so complacent," said one money manager. "It's amazing to me."

The Chicago Board Option Exchange Volatility Index, or VIX, rose 7.3% to 36.58, but it remained stubbornly below 40, much less 50 -- which it briefly breached last October. Similarly, the CBOE put/call ratio rose to 0.90 but never exceeded 1.0 intraday, which would have indicated greater demand for defensive puts vs. optimistic calls.

The money manager, who required anonymity, observed that Monday marked an "outside reversal day" for the

S&P 500

, a technical term for a session in which an index (or stock) produces a higher intraday high than the prior session but closes lower than the prior session's intraday low. On Monday, the S&P traded as high as 852.25 before closing at 834.81. On Friday, the index traded as high as 846.99 and as low as 837.28.

Reversal days are generally considered bearish by technicians. March could prove to be a "pivotal month" to the downside, he said, suggesting the S&P might trade as low as 750.

Beyond the market's decline and apparent complacency of most participants, hardcore bears were further enlivened Tuesday by weakness in homebuilding shares and bearish comments from Warren Buffett.

Shake the Foundation

The S&P Homebuilding Index fell 6.9%, a decline initially triggered by an announcement of 7% first-quarter order growth by

Lennar

(LEN) - Get Report

, which lost 7.2%. J.P. Morgan, which had expected 23% growth, issued some cautious comments in reaction.

"Looking forward, we anticipate additional order growth declaration," wrote building analyst Michael Reahut, noting "Lennar's deceleration is in line with several other builders," including

Toll Brothers

(TOL) - Get Report

, which lost 3.1%, and

KB Homes

(KBH) - Get Report

, down 5.9%.

Separately,

Federal Reserve

Chairman Alan Greenspan offered some modestly cautious comments, saying in a

speech that: "the frenetic pace of home equity extraction last year is likely to appreciably simmer down in 2003, possibly notably lessening support to household purchases of goods and services."

Greenspan also said "it is, of course, possible for home prices to fall as they did in a couple of quarters in 1990," but the chairman again disputed any notion that the national housing market is in a bubble phase.

Nevertheless, Greenspan's comments, on top of Lennar's order growth and J.P. Morgan's comments, cast a pall over the homebuilding sector, as well as home improvement names such as

Home Depot

(HD) - Get Report

, which fell 4.3%.

In the thick of the homebuilders' swoon, Brad Ruderman of Ruderman Capital Management, emailed that he's still long the group, observing that "everyone is so quick to write the obit for these guys."

While conceding "the consumer side of the economy is frozen" right now, he's "staying long" and is still bullish on the sector, long term, as discussed

here last week.

I applaud Ruderman for standing up to be counted during a tough session. Then again, he has no position in Lennar. Among his holdings are Toll Brothers,

Centex

(CTX)

, which fell 6.9%, and

D.R. Horton

(DHI) - Get Report

down 6%.

For the record, I stand by my comment from last week that we're probably closer to the end of the homebuilders' impressive run vs. the beginning or middle. But professional and personal experience has taught me not to underestimate the power of housing and I'm not in the business of writing obits.

The Oracle Speaks, People Listen

Somewhat predictably, Tuesday brought greater analysis of the annual letter by Berkshire Hathaway's Warren Buffett. The letter was posted late Monday on

Fortune's

Web site and most of the initial discussion focused on his cautious outlook for U.S. equities. Tuesday, more of the talk was about his observations on derivatives, which he dubbed "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

Buffett further worried that:

"Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I've mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems."

That pretty well sums up the doomsday scenario hardcore bears and their gold-bug kin have long fretted about. Gold futures rose 1.1% to $353.30 and some attributed the rally, in part, to Buffett's comments.

After posting some of Buffett's draconian conclusions about derivatives in

RealMoney.com's

Columnist Conversation last night, I received a string of emails from derivative market participants who took umbrage with the "Oracle of Omaha."

The head derivatives trader at one New York bank suggested (

heresy

) that maybe Buffett & Co. "didn't really know what they were getting into" when they bought General Reinsurance, from which Buffett's qualms about derivatives mainly stem.

Another source at a major derivatives dealer declared "we have never hadbetter risk assessment and collateralization of our derivative exposure," and claimed "the meltdown theory/scare is way overblown."

Finally, another participant attributed concerns about derivatives to their complexity, which "breeds uncertainty, which breeds fear." The implosions at Long Term Capital Management and Barings were the result of a lack of internal controls, hubris and other failures, he suggested, but didn't deny that derivatives exacerbated/accelerated problems at those and other firms.

Such protestations notwithstanding, Buffett's harsh comments gave a lot of cover to the skeptics, who had a lot to crow about Tuesday.

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.