Stocks fell sharply Thursday after a sector downgrade and an overseas sell-off caused skittish investors to grow concerned that the rally has outpaced the potential for future earnings growth.
The blue-chip Dow Jones Industrial Average ($INDU) dropped 93 points, or 0.9%, to 10,334. The broader S&P 500 ($INX) fell 14 points, or 1.3%, to 1,096, while the tech-heavy Nasdaq Composite ($COMPX) shed 36 points, or 1.7%, to finish at 2,157.
Asian stocks sparked the global sell-off as Japanese companies' plans to sell more shares raised fears among investors that the value of their current holdings would be diluted. That helped push Tokyo's Nikkei down 1.3% for the session. Shares throughout Europe also closed broadly lower Thursday, with the effect then spreading to U.S. equity markets.
Adding to the selling pressure was a Bank of America (BAC) downgrade of the global chipmaking industry, as well as semiconductor giants Intel (INTC) and Texas Instruments (TXN), over concern that supply is growing faster than demand. Chipmakers are among the most economically sensitive and early cycle sectors, meaning they move well ahead of both recessions and recoveries.
Sam Stovall, chief investment strategist at Standard & Poor's, said Thursday's sell-off was consistent with a market that is trading more on sentiment than fundamentals. "We might just be going through the typical back and forth as the market grinds higher," Stovall says. "We hit technical resistance on the S&P at about 1,120, and like a rusty door, we'll probably have to bang on it a few times to get through."
The Dow's triple-digit decline for most of Thursday session can also be attributed to the fact that investors who have gained so much in a such a short period of time are loath to relinquish any gains once the selling pressure builds, says Stovall. "Investors are no better than hyperactive first-graders fighting over musical chairs," he says.
In other action, the safe havens of the U.S. dollar and Treasurys rose, as did the price of gold, which closed up 70 cents at $1,140.40. Oil retreated to $77.51 a barrel.
Of the S&P's ten major sectors, financials, technology and energy shares were the biggest losers. Health care and consumer staples held up best, but still posted losses for the day.
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