Updated from 5:33 p.m. EST
The subprime chickens came home to roost again Tuesday, despite some early morning crowing from Wall Street's prized rooster.
Blowout earnings from
helped to contain early losses despite a weaker-than-expected February retail sales report. But Goldman's strong stance was ultimately overshadowed by more drama in the subprime space.
Dow Jones Industrial Average
closed down 242.66 points, or 2%, to 12,075.96; the
lost 28.65, or 2%, to 1377.95; and the
shed 51.72, or 2.2%, to 2350.57.
Fueling the selloff were the latest developments in the rapidly deteriorating business of lending to homebuyers with weak credit histories:
Accredited Home Lenders ( LEND) said its cash has been used up by margin calls and forced loan repurchases. Shares plummeted 65%.
A day after Countrywide Financial ( CFC) said foreclosures rose to a five-year high, hurting its earnings, the lender said it will cut 108 jobs in its wholesale unit. Shares fell 4.7%.
New Century Financial shares were suspended for good from New York Stock Exchange trading a day after a session-long trading halt. Separately, the company said it is being investigated by the Securities and Exchange Commission regarding "the events leading up to the company's previous announcement of the need to restate certain financial statements."
Homebuilding stocks such as Beazer Homes , Hovnanian and Standard Pacific tumbled in response. The S&P Homebuilding SPDR fell 3.5%.
Goldman's morning glory helped contain the early negative response to the subprime woes, as major averages were initially down modestly. But the wheels came off after the noon release of the Mortgage Bankers Association's report on fourth-quarter delinquencies and foreclosures. The data showed higher-than-expected overall delinquency rates and a four-year high for the subprime category.
Selling accelerated in reaction to the data, and major averages closed just a hair above their worst levels of the session. (Programming note: Tonight's
Real Story podcast features an exclusive interview with Doug Kass of Seabreeze Partners, who helps break down today's selloff and the implications of the subprime debacle, about which he has
strong feelings .)
The selling was intense and widespread, approaching the drama seen during the week of Feb. 26. In NYSE trading, decliners led advancing stocks by 27 to 5, and down volume was 94% of the 3.5-billion-share total. In Nasdaq activity, decliners led advancing stocks 5 to 1, and down volume was 88% of the 2.2-billion-share total.
The significance of another big down day after last week's rebound effort shouldn't be underestimated.
Heading into Tuesday's session, the technicians at Lowry's Reports, the nation's oldest technical research firm, generally viewed the recent selling as a correction within an ongoing bull market, rather than the start of a new bear market.
"If we have another 90% downside day, that would change our attitude," Richard Dickson, senior market strategist at Lowry's, told me Tuesday afternoon. "If that happens, we'd have to re-evaluate that the lows were made a week ago, and we could be in for a lower low, perhaps substantially."
For the record, Lowry's defines a 90% downside day as a session in which both volume and price action are at least 90% to the downside. At press time, I am unable to confirm whether NYSE price action was also 90% to the downside; Dickson was unable to comment after the close.
And recent lows for major averages were 12,039 for the Dow, 1374 for the S&P and 2340 for the Comp.
"Everyone is going to key off the 1374 area" for the S&P, says a trader, who suggested that the upcoming expiration of stock index futures, stock index options, stock options and single stock futures probably exacerbated Tuesday's weakness. But Friday's so-called quadruple witching session "should settle out the market" in the days ahead, he adds.
"Tomorrow at the open we'll probably test that 1375
level and then get a snapback," says the trader. "But if it breaks 1375, I'm gone. I'll buy a dip here, but if it doesn't act well, 'See you later.' That's what everyone is doing."
The source, who requested anonymity, says the selling in the financials has been overdone and believes
( LEH) first-quarter results will be the key to Wednesday's response to Tuesday's thrashing.
The broker "has said publicly they're totally hedged in subprime," he says. "If they get the Street to believe that,
the rebound could be nice. The world hasn't changed that much."
And if I can get the folks at Carnegie Hall to believe I can sing...
Speaking of the financials: Concerns about a spreading of the so-called subprime fungus weighed heavily on names exposed to the sector, including Lehman,
( BSC), which fell between 4.4% and 6.65%.
Even Goldman Sachs closed down 1.8% to $199.03, after trading as high as $208.56 intraday. The Amex Broker/Dealer Index lost 4.4%, and the Philadelphia Stock Exchange/KBW Bank Index shed 3.3%.
"Today Goldman reported good numbers and the stock is off $10 from its
intraday high," says one market watcher. "That's not a very good sign short-term and says the corrective phase isn't over."
The source, who requested anonymity because of his firm's compliance requirements, also says the chart of the
suggests more weakness ahead.
"I don't see how the market is making a low if
QID is ready to rally," he says. "If we were at a bottom, QID would be topping. It doesn't look like it."
The QID, which returns twice the opposite performance of the Nasdaq 100, rose 4% on Tuesday.
Speaking of tech stocks: Lost in the subprime shuffle was the market's dour reaction to
midquarter update late Monday. For the sin of merely narrowing its EPS and revenue guidance ranges, rather than raising the upper end, Texas saw its shares punished to the tune of 2.6%. Separately,
shed 5.4% after a UBS downgrade, and the Philadelphia Stock Exchange Semiconductor Index lost 1.7%.
Notably, it was just Friday that the chip stocks were notably strong even as the broader market was flat. In this regard, Friday reminded me of the action on Feb. 22, as I noted on
In hindsight, both Friday's session and Feb. 22 were harbingers of big declines. The lesson being: The chips are no longer leaders and may actually be a contrary indicator. For certain, be wary if the chips show strength in a vacuum.
As originally published, this story contained an error. Please see
Corrections and Clarifications .
Aaron L. Task is editor at large of 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 appreciates your feedback;
to send him an email.