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Stock selloff deepens Dow tumbles 150, Nasdaq slumps as investors eye selloff in China, thwarted attack on Cheney, drop in durable goods orders. By Alexandra Twin, CNNMoney.com senior writer February 27 2007: 11:52 AM EST
NEW YORK (CNNMoney.com) -- The stock selloff worsened near midday Tuesday as reports of slumping stocks in China and Europe and a steep decline in durable goods orders raised worries that the recent rally may be tapped out.
News that Vice President Dick Cheney was the apparent target in a Taliban suicide bombing attack in Afghanistan added to the morning concerns.
Quick Vote Is the stock selloff just a blip or the start of a longer downturn? BlipLonger slumpToo early to say or View resultsVideo More video
CNNMoney.com's Allen Wastler discusses the plunging durable goods report and more business news. (February 27) Play video
CNN's Gerri Willis has the latest financial news in the morning business update. (February 26) Play video
The Dow Jones industrial average (down 151.09 to 12,481.17, Charts) sank about 1 percent roughly two hours into the session, as did the broader S&P 500 (down 17.44 to 1,431.93, Charts) index. Both blue-chip averages have fallen for the last four sessions.
The Nasdaq (down 42.39 to 2,462.13, Charts) composite slumped 1.5 percent after having slid for the last two sessions.
Market selloff: Year of the bear? Treasury bonds rallied as investors sought a safe place to park their money while the dollar fell.
Chinese stocks slumped 9 percent Tuesday - the worst one-day selloff in a decade - on concerns that the government would interfere to cool the speculation that drove the Shanghai market up 130 percent last year. (Full story).
Other Asian markets slumped in tandem. European shares also tumbled in late trade.
The slump in world markets exacerbated concerns that Wall Street is due for a selloff after a nearly eight-month rally that has sent the Dow industrials to record highs and the Nasdaq and S&P 500 to more than 6-year highs.
"The selloff certainly demonstrates somewhat starkly the inter-connectedness of stock markets around the world," said Hugh Johnson, chief strategist at ThomasLloyd Global Asset Management.
"Markets can decline in one seemingly isolated part of the world and that decline can be transmitted to other parts of the world through the psychology," he said.
In the longer term, he said, the selling will ease as the shock wears off. Yet markets will "continue to be vulnerable to big decisions by big policy-makers in big places like China," he added.
More on the markets A morning report in the United States showing a steeper-than-expected decline in durable goods orders in January added to concerns about slowing economic growth.
Slowing growth ultimately drags on corporate profits, making stocks more expensive relative to earnings. For more on the day's economic news, click here.
The drop in durables dragged on blue chips such as Dow components Alcoa (down $1.07 to $34.29, Charts), Caterpillar (down $1.63 to $65.63, Charts), General Motors (down $1.02 to $32.95, Charts) and Boeing (down $0.90 to $88.03, Charts).
In all, 29 of 30 Dow components slipped. Other losers included the blue-chip average's technology components, IBM (down $1.15 to $95.76, Charts) and Hewlett Packard (down $0.63 to $39.66, Charts).
Among other movers, Apple Computer (Charts) slumped after it said late Monday that its Apple TV will be delayed until mid-March.
Market breadth was negative On the New York Stock Exchange, decliners trounced advancers by more than five to one on volume of 790 million shares. On the Nasdaq, losers beat winners by almost six to one on volume of 1.06 billion shares.
Also hurting stocks Tuesday: news of a suicide bombing attack at the entrance to the main U.S. military base in Afghanistan during a visit by Dick Cheney. The attack killed at least 23 people. (Full story).
In addition to durable goods orders, the morning brought the latest read on the housing market.
Check world markets Existing home sales grew at a faster-than-expected pace in January, in a report that also showed the pace of sales dropped from a year ago. The median price of a home sold in January was down versus a year ago. (Full story).
Another report showed that consumer confidence saw a surprise rise in February versus forecasts for a drop.
Investors were also still digesting Monday reports that former Federal Reserve Chairman Alan Greenspan says the economy could fall into a recession by the end of 2007. (Full story).
Tuesday kicks off a busy week for economic news, with reports due later in the week on fourth-quarter gross domestic product growth, new home sales, personal income and spending and the manufacturing sector.
Treasury prices rallied as investors sought safety, lowering the yield on the benchmark 10-year note to 4.59 percent from 4.62 percent late Monday. Treasury prices and yields move in opposite directions.
In currency trading, the dollar fell versus the euro and the yen following the durable goods orders report.
U.S. light crude oil for April delivery rose 70 cents to $62.09 a barrel on the New York Mercantile Exchange, erasing morning losses. The price of oil rose for the last four sessions.
COMEX gold for April delivery fell $10.50 to $69.30 an ounce.
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DJIA Sees Biggest Drop In 5 Years Last update: 2/27/2007 3:59:22 PM
NEW YORK (Dow Jones)--The Dow Jones Industrial Average suffered its worst point loss in years Tuesday, after mounting concerns about risk set off by an overnight selloff in Chinese stocks produced a rout in U.S. shares that escalated through the afternoon.
A plunge of around 200 points in just 15 minutes of midafternoon trading left the Dow Jones Industrial Average down 546 points at its Tuesday low, the worst decline for the average in more than five years. The drop wiped out all of the index's gains on the year.
The Standard & Poor's 500 Index also plunged into negative territory on the year. Both recently were down about 3% on the day after being down 4% at their lows.
Strategists who had called the morning's deep selloff orderly acknowledged that investors had become alarmed as negative sentiment snowballed. "I think this is panic selling by people who haven't seen a move this big in years," said Jeff Shaw, head trader at the Timber Hill LLC market-making unit of Interactive Brokers Group Inc. "We haven't seen a move like this in a long time."
One indication of traders' new mood: After months languishing at or below 12 points, the CBOE Market Volatility Index, which measures volatility in stock index option prices on the S&P 500 and is a sign of investors' fear of a market drop, spiked 57% to 17.45 points. The index is heading for its highest close since the spring 2006 correction, though it's still off the record intraday high of 23.49 points seen on June 14.
Officials at the New York Stock Exchange, owned by NYSE Group Inc. (NYX), were looking into the cause of the steep drop. Volumes were extremely high, with NYSE composite volume approaching 4 billion shares and easily topping the previous record of 3.58 billion shares. Volume on the Nasdaq Stock Market (NDAQ) was 2.75 billion with 15 minutes left to trade, within striking distance of the record of 3.09 billion shares.
The drop came after the period when a circuit breakers could have been triggered and was below the level needed to trip them anyway. Trading on the New York Stock Exchange can be halted by a 10% drop - roughly 1,250 points on the DJIA - before 2:30 p.m., but trading continues if the markets drop later.
Some stock dealers said investors didn't seem to be worried enough. "People aren't panicking," one trader said. "Maybe this is a bad thing." -
By Karen Talley, Dow Jones Newswires; 201-938-5106; karen.talley*dowjones.com (Mohammed Hadi and Spencer Jakab contributed to this article.) (END) Dow Jones Newswires
-------------------- "Great Day for Up!"....Dr. Seuss
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Don't let short-term drops blow up your long-range strategies
Tuesday February 27, 9:58 pm ET By Chuck Jaffe Don't let short-term drops blow up your long-range strategies
BOSTON (MarketWatch) -- If the stock market's big decline Tuesday made you nervous, try the following: Take a red marker and make a big X on Feb. 27 in your calendar. Make no other marks or notations. Then go about your regular business for the next 10 months.
When the end of the year rolls around -- assuming you review your calendar before you either file it or toss it -- see if you remember why you actually made Tuesday a red-letter day.
Chances are the 416-point decline in the Dow Jones Industrial Average will pass, just like so many others before it. And what investors need to keep in mind is that there have been many others; while Tuesday's drop represents the seventh-largest point drop in Dow history, at 3.27% it is just the 37th-largest percentage decline day since 1950. In percentage terms, if you go back to 1900, you'd have another 200 days where the Dow suffered bigger losses.
As the old song says, Mama said there'd be days like this. On the Dow, on average, there's one every 18 months or so.
While the size of the decline may have been a surprise, plenty of investors seem to have been expecting something. On Monday, the UBS/Gallup Index of Investor Optimism for February showed a significant decline from January; despite the decline in optimism, the survey showed that two-thirds of Americans still feel it's a good time to invest.
The falling optimism/good-time-to-invest dichotomy highlights what some observers believe is complacency on the part of investors.
"It's not that we have seen a euphoric bullishness," says James Stack, editor of the Investech newsletter, "but more of a comfortable complacency. Investors have now gone almost four years -- 47 months -- without a 10% correction in the blue-chip indexes. That's the second-longest period in the history of the Standard & Poor's 500, and I think it has lulled a lot of people into a sense that the market's not going down any time soon."
Having now seen the market take a shot in the gut, the question is whether investors will be knocked from complacency into overdrive, making the kind of short-run moves that blow up long-term strategies.
"For the average investor holding a diversified portfolio with a long time horizon, this is just a bump in the road, something you may notice when it happens, but which you don't really remember when you reach your destination," says Terrance Odean, a finance professor at the University of California, Berkeley, who researches investor behavior.
"This kind of drop is emotional, it makes people want to panic, it makes them want to watch the news all the time, it makes them want to do something. Instead, they should put away the paper, turn off the television and go to the beach or go skiing. When you're emotional, it's not the time to make major reallocation decisions."
That doesn't mean that investors should ignore the big decline or what might happen next. Instead, it's a good gauge of risk and pain tolerance.
Psychological warfare Had the market gained more than 3% in a single day, no one would have been complaining, even though the size of the move illustrates current volatility; no one minds when the market is volatile in their favor. "Investors would be delighted with a 400-point gain and emotional about a 400-point loss because they don't have a solid idea of what they really need over time, and they are focused on what is happening today," says Donald MacGregor of MacGregor-Bates Inc., a Eugene, Ore.-based firm that does research in judgment and decision-making. "In times like these, you really need to understand yourself emotionally."
That being the case, the question for most investors is whether the market's big drop, and whatever comes next, actually forces a change in behavior, the proverbial reach for antacids to calm the stomach.
The point of marking the calendar is that virtually every big market drop becomes routine in time. Nearly 20 years after the market crash of 1987, for example, there is not a crowd of people claiming that they would be able to retire today, rather than working a few years past age 65, if they had only been out of the market on that particularly bad day. The market plunged more than 22% on Oct. 19, 1987.
"You have seen this before, and while the finer points and circumstances are different, the truth is that this will not be serious stuff as it relates to your lifetime as an investor," says Meir Statman, a Santa Clara (Calif.) University professor who studies behavioral finance. "The people who ride out the market now may have some short-term stomach pain, but they won't have the long-term pain that comes from ripping up their portfolio at the wrong time."
Statman suggests that average investors should put in their own "circuit-breaker," akin to what the stock exchanges use to steady the market on big-move days. His idea is a 10-day moratorium on making portfolio changes, so that an investor who woke up Tuesday morning feeling like they had a reasonable strategy in place should not consider altering that strategy until they have lived with the perceived pain long enough to know they can no longer sleep at night.
That strategy would upset market-timers, but most investors aren't trying to time the market.
"If you want to do something after the market has one big down day, take a sleeping pill," says Statman. "If you're still feeling it after 10 days -- when you see what the market does next -- then maybe it's time to make a change, but just maybe. All of the research shows that you're more likely to hurt yourself making changes after days like this than you are to help yourself."
-------------------- "Great Day for Up!"....Dr. Seuss
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