Springtime for the financial markets is over. In contrast to the sunny attitudes of April and May, when all news was greeted optimistically, both equity and fixed-income investors focused on the negatives Tuesday. The results were harsh for those who were long either.

Treasury investors fretted over the surprisingly strong Institute for Supply Management nonmanufacturing survey and lackluster demand for the first leg of the Treasury's quarterly auction. The price of the benchmark 10-year note tumbled 1 8/32 to 93 16/32, its yield rising to 4.45%.

"The three-year auction was

priced relatively cheap, and lower prices bring in more selling," said one Treasury market participant, who requested anonymity. "The long and short of it is the selling isn't ending, because you have a huge disconnect between the front end

of the yield curve, which knows the

Fed

is on hold, and the long end, which is fearful of economic growth, inflation and a weaker dollar." (Considering the slide in Treasuries and stocks, the dollar held up fairly well Tuesday, although it was weaker vs. both the euro and yen.)

Equity investors mainly lamented the latest rise in Treasury yields, as well as a 43% jump in layoffs in Challenger Gray & Christmas' survey, and cautious guidance from

Costco

(COST) - Get Report

,

Gillette

(G) - Get Report

and

Cephalon

(CEPH)

. News of a terrorist bombing in Jakarta didn't seem to weigh too heavily on shares, but neither did it aid Wall Street's dour mood.

After battling the downward pull for much of the day, major averages stumbled sharply in the final hour to end at session lows and below some closely watched technical levels. The

Dow Jones Industrial Average

fell 1.6% to 9039.05, the

S&P 500

shed 1.8% to 965.39 and the

Nasdaq Composite

lost 2.4% to 1672.94. Rate-sensitive stocks came under renewed selling pressure with the Philadelphia Stock Exchange/KBW Bank Index down 1.9% and the Amex Broker/Dealer Index off 1.8%.

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Having avoided a technical breach Monday, the S&P was unable to accomplish the same trick Tuesday. The index breached support at 975 and fell below 970, the bottom end of its seven-week long trading range. The S&P ended right at 965, a closely watched level with more long-term significance. The 965 level was the weekly closing low after the Sept. 11, 2001, terrorist attacks, and represented the neckline of a head-and-shoulders pattern going back to 1998 and was the level at which the rally last summer broke down. That level then acted as resistance during subsequent rallies, until it was finally surpassed intraday in late May and on a closing basis in early June.

"So the 965 level is a well-known level for the bulls," observed

StreetInsight.com

contributor Jeff Cooper. "It's their Maginot Line. They either put up there, or shut up."

While less technically significant than the S&P's slide, the Dow closed below its 50-day moving average of 9101, while the Comp ended just 5 points above its comparable level.

Reflecting the arrival of August's

dog days, trading volume was subdued, although not dramatically so. Market internals were decidedly negative, however, reflecting the market's souring trend. Declining stocks led advancers 22 to 9 in

Big Board

trading, where 1.3 billion shares traded and new 52-week lows led new highs for a second straight day. Losers led 2 to 1 in Nasdaq trading, where nearly 1.7 billion shares were exchanged and new 52-week highs bested new lows 99 to 9.

To tech-obsessed traders, Tuesday's session was mainly a buildup to earnings news from

Cisco

(CSCO) - Get Report

. After the close, the networking giant reported fiscal fourth-quarter earnings of 15 cents per share, in line with analysts' consensus. However, the firm's stock, which had fallen 2% to $18.86 in regular-hours trading, traded down further in after-hours activity.

Down on the Upside, Reprise

The day's macro economic news, albeit second-tier reports, reflected concerns that while

the recovery is here, the jobs aren't.

At 65.1, the ISM services index was well above the expected 58 and an all-time high for the 6-year-old index. The new-orders component also reached a record high of 66.9. While the employment index rose just 0.4 to 50.7, the expectation is strength in new orders will ultimately lead to a more robust labor market, at least in the services sector. "Rising business confidence" -- also reported in the survey -- "in conjunction with sales growth yields hiring and increased capital spending," observed Gerald Cohen, senior economist at Merrill Lynch.

However, Challenger's report that layoffs rose to 85,117 in July vs. 59,715 in June "does not bode well for future employment," Cohen continued, noting layoff announcements often presage jobless claims.

Donald Straszheim, president of Straszheim Global Advisors in Santa Monica, Calif., took a blunter view: "The job market is undeniably weak still, and we see this as an ongoing drag," he wrote.

While simultaneously concerned about the outlook for housing, weakness among our major trading partners and the financial straits of state and local governments, Straszheim is generally upbeat about the economy. He's forecasting GDP growth around 3% in both the third and fourth quarters and around 4% in 2004, citing such positives as hefty fiscal and monetary stimuli, the "hot war" in Iraq being over and a "choppy" recovery in tech orders and sales.

"We are optimistic on the economy and bullish on equities," he concluded. "But there is too much overly optimistic talk from the conflicted talking heads. Restrain yourself

and avoid irrational exuberance."

Restraint was clearly the order of the day Tuesday, be it rational or otherwise.

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.