Dow Hits 3-Month Low, Sheds 4% for Week

Stocks closed sharply lower Friday as oil prices climbed about $3 and a concoction of rumors and bad news shook up the banking sector.

The Dow Jones Industrial Average broke through the key 12000 mark, tumbling 220.97, or 1.8 percent, to finish at 11842.12.

The Dow shed 4 percent for the week, finishing at its lowest point in three months and just 100 points above its March low.

Major U.S. Indexes

	Last	Change	% Change	1 Week % Change	YTD % Change
Dow	11842.12	-220.97	-1.83%	-3.78%	-10.73%
S&P 500	1317.87	-24.96	-1.86%	-3.10%	-10.25%
NASDAQ	2406.09	-55.97	-2.27%	-1.97%	-9.28%
Russell 2000	725.70	-12.13	-1.64%	-1.08%	-5.26%

The S&P 500 crept ever closer to the key 1300 level, ending the week off 3.1 percent at 1317.87. The Nasdaq took a beating on Friday, but fared the best of the three for the week, off just 2 percent, as some investors started moving money into tech.

American Express was the biggest drag on the Dow this week, shedding 8 percent. General Electric led S&P 500 decliners and Cisco Systems was the biggest loser on the Nasdaq.

Adding to the volatility today was quadruple witching, when contracts for stock index futures, stock index options, stock options and single stock futures expire in the same day.

As major indexes revisit their March lows, the "C" word -- capitulation -- has been tossed around the market. Strategists are willing to concede that some sectors, namely regional banks, are in a state of capitulation, but many say there's still further to go for the broader market.

"I think capitulation's a strong word," said Brian Gendreau, investment strategist at ING Investment Management. "When you get a capitulation trade you get a feeling of total despair and darkness in the market where people just completely throw in the towel, and I don't see that at all."

The volume is too light -- especially for an expirations day -- to call this capitulation, said Tom Schrader, managing director for U.S. equity trading at Stifel Nicolaus.

"If we're going to flush it, let's flush it," Schrader said. "Get the VIX to trade up to 30 -- really put the fear of god in everybody. That's what creates capitulation."

The CBOE Volatility Index (VIX), viewed as the best gauge of fear in the market, shed 8.4 percent this week to finish at 23.01.

There have been some rumblings in the market that we may see a rally next week as we near the end of the second quarter and first half of the year but Schrader doesn't see anything pointing toward a rally.

"I'm not sure we've gotten oversold enough to call for a technical rally," he said, adding: "We may have somewhat of a rough summer."

Traders will look to the Federal Reserve next week for direction on the economy. Policy makers are holding a two-day meeting starting on Tuesday. Also next week, a final reading on GDP and a report on personal income and spending.

Telecoms and consumer-discretionary stocks were the hardest hit this week, with both sectors finishing off more than 5 percent.

"Financials are signaling the economy is going to be in less than desirable condition going forward and techs are following them lower as techs are usually among the first to suffer from a pullback," Schrader said.

The financial sector, which lost 4.8 percent this week, rattled the market as investors digested a slew of rumors, downgrades, dividend cuts other news.

The latest rumor in the market is that JPMorgan , which earlier this year bailed out Bear Stearns, may be on the prowl for a new acquisition. Sources tell CNBC that CEO Jamie Dimon is mulling a purchase of a regional bank -- Wachovia and SunTrust are names that have come up on the short list.

Traders didn't seem to be impressed with speculation, sending shares of Wachovia and SunTrust lower initially. It's hard to blame them after Dimon and other JPMorgan executives this week conceded that Bear Stearns was worth far more than the $10-a-share they paid.

But shares of SunTrust finished up 5.5 percent as the bank said it doesn't plan to cut its quarterly dividend or issue additional shares.

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Shares of JPMorgan and Wachovia each fell 2 percent.

Large-cap regional bank stocks are now in "capitulation mode" and will likely trade below fair value in the near term, said Merrill Lynch analyst Edward Najarian. The analyst cut his earnings estimates by an average 22 percent and 19 percent for 2008 and 2009, respectively. He also expects more banks to cut dividends and raise capital in the second half, including Bank of America and Wachovia.

Earlier, rumors of a profit warning from Merrill Lynch sent a ripple through the market. Merrill has refused to comment on the speculation but sources tell CNBC the rumors aren't true. Still, the stock dropped 4.8 percent.

Moody's stripped the insurance arms of Ambac Financial Group and MBIA of their AAA ratings, because of their weakened ability to raise capital and write new business.

MBIA shares, which have already tumbled 68 percent from the start of the year, dropped 13 percent. Ambac shares rose 1 percent.

The tech sector took a beating Friday with the new four horsemen of tech, as they're called -- Apple , Research In Motion , Google and Amazon -- all finishing down at least 2 percent.

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