Updated from 1:45 p.m. EDT

Major averages were hovering near break-even midday Thursday, then fell sharply at around 1:30 p.m. after more hawkish comments from Dallas Fed President Richard Fisher.

Fisher -- who had given investors false hope with this "eighth inning" comment last summer -- issued a warning about inflation for a second straight day, saying it shows "little inclination" of declining. Inflation is a "virus" that cannot be allowed to "poison the system," Fisher said, making allusions to the 1970s. The Fed governor added that businesses may be more aggressive at passing through higher energy costs, which adds to inflationary pressures.

In recent action, the Dow Jones Industrial Average was down 0.4% at 10,273.42 vs. its earlier high of 10,369.55. Caterpillar ( CAT) and Hewlett Packard ( HPQ) were among the drags on the Dow. Gainers included Wal-Mart ( WMT), which said same-store sales rose 3.8% in September and expects an increase of 2% to 4% for October, and General Electric ( GE), which raised its earnings guidance.

The S&P 500 was down 0.5% to 1190.48, about 10 points below its intraday high, while the Nasdaq Composite was down 0.5% at 2086.62 vs. an earlier best of 2110.82.

Following several days of heavy selling, Thursday's midday swoon comes as trend watchers are forecasting further pressure over the coming weeks.

As mentioned here Wednesday, Cantor Fitzgerald strategist Marc Pado believes the market had been too complacent in September about the impact of Hurricane Katrina, soaring energy prices, and a Federal Reserve still hell bent on lifting interest rates.

But any complacency started unwinding in the first three sessions of October, with the Dow falling 2.4%, while the S&P 500 lost 2.6% and the Nasdaq fell 2.3%.

The pullback could lead some to believe that a sharp rebound is near, as lower valuations attract fresh buying. But contrarian investors, who believe that buying opportunities arise when negative sentiment has reached a peak, say there is still a ways to go on the downside.

Don Hays, head of Hays Advisory Group, says bullish sentiment is just in the process of deteriorating, and will likely need to erode further to rebuild the so-called "wall of worry," over which bulls can later climb.

"Ladies and Gentlemen, the wall-of-worry is being rebuilt strong and wide," Hays wrote in a morning note.

Hays sees the market approaching a major buying opportunity, presumably as more selling leads to more negative sentiment. But others believe there are negative fundamental trends for the intermediate term.

Worries that soaring energy costs are hurting the economy and profits while pressuring the Fed to hike rates further precipitated the recent downtrend in stocks. But while oil prices have trended lower over the past couple of weeks, that has not helped the stock market. On the contrary, lower oil might even be contributing to the downside given the large weight of energy stocks on the S&P 500.

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