Another Day of Heavy Selling

Updated from 4:04 p.m. EST

Stocks on Monday erased the previous session's rebound, with all the major indices closing at new lows for the year, as the latest round of terrorism jitters diverted traders' attention from more positive Wall Street stock research and some encouraging economic news.

The Dow lost 137.19 points, or 1.3%, to 10,102.89 a three-month low; the S&P 500 was off 16.14 points, or 1.4%, to 1104.43; and the Nasdaq dropped 45.53 points, or 2.3%, to 1939.20, as all three indices fell for the fifth time in six sessions.

The latest decline put the S&P 0.6% below where it started the year, while the Dow and the Nasdaq are both down 3% in 2004.

Volume on the New York Stock Exchange reached over 1.5 billion, while over 1.7 billion shares changed hands on the Nasdaq. Decliners outnumbered advancers by about 7 to 2 on both exchanges.

"On Friday, I think we saw a lot of short-covering, which took us flat into the weekend, and now we're a little over-extended," said Todd Leone, head of listed stock trading at SG Cowen. "The terrorist fears after the incident in Spain last week put a little damper on the market today, and we're seeing a little selloff, but I don't think people are going to do too much before the Fed meets tomorrow. Wednesday and Thursday could be very volatile days."

The Federal Open Market Committee will meet at 9 a.m. Tuesday for the second time this year to discuss monetary policy. Any policy changes will be announced around 2:15 p.m. EST. The government's disappointing February employment report, released two weeks ago, all but ended speculation that the Fed would raise the federal funds rate above its current level of 1% any time soon, but the central bank's accompanying policy statement may say something new about the pace of economic growth and the labor market.

The Fed's last policy statement roiled the markets because it dropped its long-standing language about keeping rates on hold for a "considerable period," saying instead that it would be "patient" in maintaining its accommodative monetary policy.

"The Fed has said that they've seen improving signs on the jobs front, but they still plan on keeping rates low well into the next recovery, so I think that will pretty much stay the same," said Sean Martin, a head trader at A. Gary Shilling. "If they were to say something along the lines of speeding up interest rates, that would shock the markets. If they're status quo, things will be fine. That's what's expected."

"It looks to me like you're going to see more of a correction in stocks, which is going to increase volume, prop up bonds, and create bigger trading ranges," he added.

The 10-year Treasury note was up 5/32 in price to yield 3.76%, while gold and crude oil prices rose. The dollar was weaker, buying 110.28 yen, compared to 110.82 late Friday. Against the euro, it slid to $1.2271 from $1.2215.

In Europe, London's FTSE 100 closed down 1.2% to 4413, while Germany's DAX was off 2.7% to 3811. In Asia, Japan's Nikkei rose 1.4% overnight to 11,318, while Hong Kong's Hang Seng fell 0.1% to 12,919.

On the economic front, the Fed reported that industrial production grew 0.7% in February compared to January's 0.8% growth rate. That figure beat consensus estimates, which predicted a 0.4% growth rate in February. Also, the industrial sector operated at 76.6% of capacity, up from 76.1% in January. That number also edged out expectations.

Separately, the New York Federal Reserve Bank reported the results of its Empire State manufacturing survey. The general business conditions index stayed positive but fell unexpectedly to 25.3 from 42.05 in February, signaling continued improvement at a slower pace. Economists predicted the index to drop to 38.

Europe's weakness followed reports that a Morrocan man arrested in Spain in connection with last week's terrorist bombings that killed 200 people was linked to al Qaeda members. Also, authorities discovered a videotape in a trash can near a Madrid mosque in which a man with a Moroccan accent took credit for the bomb blasts in Spain Thursday. On the tape, the man reportedly said the attack was "a response to the crimes that you have committed in the world and specifically in Iraq and Afghanistan, and there will be more attacks, God willing."

In the wake of the explosions, Spain's Socialist party scored a major electoral upset Sunday, ousting the incumbent Popular Party, which had backed the Bush administration in its war on Iraq. Newly elected Prime Minister Jose Luis Rodriguez Zapatero immediately pledged to recall Spain's 1,300 peacekeeping troops from Iraq by June 30.

Meanwhile, investors also must contend this week with a meeting of the Federal Reserve's policymaking arm, which isn't expected to touch interest rates but might change its assessment of the economy in light of the weak February jobs data. The one-day meeting will be held Tuesday. Stocks are coming off their worst week in a year, a performance that saw the Dow Jones Industrial Average complete a long-awaited 5% retreat from its highs and left the major averages at 2004 lows before a bounce in the week's final session. But Friday's rally came amid extremely light volume, and the Dow finished down 3.4% for the week.

Peter Dunay, a chief market strategist at Wall Street Access, said that although investors were expecting the market to correct, they weren't prepared for last week's steep losses. That, coupled with a new terrorism scare and some disappointing economic data, has people spooked.

"People are really going to be looking for how far and how fast this downside move wants to go before it finds support, and it looks like it's going to continue its trend lower here," said Dunay. "As long as the economic and earnings picture stays good, I really think the market should find a base to correct a little as opposed to really seeing this turn into a bear market. The market wants to find that support line where it thinks companies are more fairly valued."

Wall Street brokerages continued to turn out positive stock research Monday morning. Among the bullish calls was CIBC warning against an allocation out of semiconductor stocks, saying concerns about personal computer sales are overblown. It predicted strength in Vitesse ( VTSS), Maxim Integrated ( MXIM), Zoran ( ZRAN) and Intersil ( ISIL) .

Meanwhile, Bear Stearns upgraded graphics-chip maker ATI Technologies ( ATYT) to outperform and raised its price target to $18.50, citing a recent pullback. Other positive calls include an upgrade of United Technologies ( UTX) and Goodrich ( GR) at Deutsche Bank and raised earnings estimates for Cigna ( CI) and eBay ( EBAY)at Goldman Sachs.

General Electric ( GE) agreed to acquire InVision Technologies ( INVN), a bomb detection technology firm, for about $900 million. Shares of InVision soared $8.13, or 19.7%, to $49.35.

General Electric also said it's confident earnings for the first and second quarters of 2004 will come in at the high end of its previously disclosed profit ranges. Its stock fell 30 cents, or 1%, to $30.30.

Martha Stewart resigned as chief creative officer of Martha Stewart Living ( MSO) and will leave the company's board. The onetime CEO, who was convicted of obstructing a probe into a private stock sale earlier this month, will assume the newly created post of "founding editorial director" with the company. It share were recently down 36 cents, or 3.5%, to $9.97.

The European Union's head office won unanimous backing from national antitrust regulators on Monday for a draft ruling against Microsoft ( MSFT), according to the Associated Press. The report quoted sources who said the ruling finds that the U.S. software giant abused its Windows monopoly; the ruling orders significant changes in the way the company operates. Microsoft shares closed down 22 cents, or 0.9%, to $25.16.

Wal-Mart ( WMT) reported Monday that same-store sales in March would come in at the high end of its forecast for a 4% to 6% increase as customers spent tax refund money. Its shares lost 58 cents, or 1%, to $57.90.

Delta ( DAL) said after Friday's close that it expects a wider loss for its first quarter because of pressure on passenger revenue, higher fuel prices and fuel hedge costs. The airline now expects a $400 million loss for the current quarter, up from the $300 million to $350 million previously forecast. Delta shares closed down $1.08, or 12.2%, to $7.76.

On Tuesday, the government is scheduled to release home building data at 8:30 a.m. EST. Housing starts are expected to increase to 1.930 million units in February compared to 1.903 in January. Building permits are expected to rise to 1.903 million compared to 1.920 million.

Earnings releases are due out before the opening bell from General Mills ( GIS), forecasted to report third-quarter earnings per share of 66 cents compared to last year's 67 cents; Lehman Brothers ( LEH), expected to report first-quarter earnings per share of $1.66 compared to last year's $1.15; and Ross Stores ( ROST), predicted to report fourth-quarter earnings per share of 48 cents compared to last year's 37 cents.

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