Stocks Close Lower in Volatile Day, Led By Tech Selloff

Stocks fell for a second straight day, led by declines in the Nasdaq after tech bellwether Cisco Systems signaled the credit crisis was hurting demand from key customers, including banks.

A late-day rebound in beaten-down financial stocks, however, pulled the indexes well off their worst levels of the day. The rebound was attributed to traders buying stocks to cover their earlier bets against the financial sector, which has been trading at two-year lows.

The Dow Jones Industrial Average erased a 220-point drop to close off about 34 points. The S&P 500 index also rebounded from a 1% decline to close little-changed. The Nasdaq lost 2% and was left with its biggest two-day percentage drop in five years.

Cisco reported a 37 percent increase in earnings and reaffirmed its fiscal second-quarter outlook. But Cisco's chief executive, John Chambers, spooked investors when he said the largest maker of computer networking equipment suffered a dramatic drop in orders  from banks and retailers, triggering concerns about Cisco's growth prospects, which relies on business spending.

Shares of Cisco tumbled and were the catalyst for the slide by other tech shares, analysts said.

Voicing similar worries about the outlook for the  economy, Federal Reserve Chairman Ben Bernanke added to the sense of caution. He said the economy faced risks on both the
growth and inflation fronts.

"They got the stocks that were doing well, the big-cap tech, the ones that have been immune to the subprime story," said Stephen Massocca, co-chief executive, San Francisco-based
investment bank Pacific Growth Equities, in reference to the impact of the Cisco CEO's comments.

Until recently, investors had been optimistic that tech shares offered a safe haven amid the credit turmoil that has roiled shares of banks and brokerages.

But, "when you have dramatic moves in the market, you're going to have a lot of day trading and that leads to volatility. A lot of people got short midday and had to cover at the close."

"The momentum game broke down today in tech," said Joe Saluzzi, co-manager of trading at Themis Trading. "It looks like it finally took a severe break. Look at Google, Baidu.com, RIM, Apple. Those stocks have gotten creamed."

Research In Motion shares sank as much as 12 percent amid fears that the BlackBerry maker would be hurt by the sharp drop in demand from U.S. banks that is hitting Cisco.

Shares of International Business Machines, the technology services company, were the biggest drag on the Dow.

Markets also were weighed by poor retail sales and lower expectations for holiday shopping.

The market drew motivation that didn't last early on after BHP Billiton announced it finally had made a bid -- rejected for the moment -- for Rio Tinto . Ford gave back gains after reporting a narrower than expected loss a day after the market was rocked by competitor General Motors.

In the day's first significant piece of economic data, new applications for jobless aid fell unexpectedly last week, dropping by 13,000, but the more reliable average of these claims rose to the highest level in six months.

Treasuries rose after Bernanke said economic growth would slow "noticeably" in the fourth quarter.

Volatility is expected to continue at a furious pace, with the Volatility Index coming off a series of large gains. A reading over 20 indicates high volatility.

Retail Earnings Mixed, But Shares Slump

Among retailers issuing bad news were Wal-Mart Stores , Limited Brands , Macy's and Nordstrom's .

Target , Gap and

Costco