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Economic Worries Leave Stocks on Bear Turf

Economic worries and profit warnings escalated this week, leaving stocks camped out in bear-market territory for the weekend.

Stocks slipped into bear territory, more than 20 percent below their October highs, during Thursday's rout, which saw the Dow tumble 340 points. Friday got off to a rough start, with stocks tumbling out of the gate after the unemployment rate shot up to a five-year high. Things turned around in the afternoon as financials, consumer stocks and some techs mustered up strength.

The Dow Jones Industrial Average and the S&P 500 eked out gains by the closing bell but all three indexes still finished off sharply for the week: The Dow shed 2.8 percent, the S&P lost 3.2 percent and the tech-heavy Nasdaq skidded 4.7 percent. Techs have taken a much harder fall as they have heavier exposure to the global economy and therefore the global slowdown that has caused so much anxiety in the market this week.

More than half of the Dow stocks ended higher Friday. Click here to see which ones they were and which stocks were the biggest Dow losers.

The CBOE Volatility Index, which is considered the best gauge of fear in the market, jumped 12 percent this week.

In addition to worries about the global economy and corporate exposure to the global market, this was a weird week that was, statistically, bound to wreak havoc on the market.

Some of the selling was investors overreacting upon their return to the market after a two-week hiatus at the end of the summer, when volumes were half the daily average.

"We are in a bear market," explains Yiorgo Areto, founder and CEO of the TMP Project. People came back to the market and, "the truth of the matter is they didn't really know where to look," he said. So, they just turned a few rocks over to make quick profits.

Then, there was the calendar selling: Some mutual funds end their fiscal year at the end of October and are starting to cash out their losing positions. Plus, some investors are gearing up to get money out of the market by year end for tax reasons. And, as if there was a need for one more reason, hedge funds are selling because they're facing huge losses and are afraid their investors will pull out.

The August jobs report got the day off to a dismal start. Nonfarm payrolls turned in a predictable enough decline of 84,000 jobs but the unemployment rate jumped to 6.1 percent, blowing past the 5.7 percent expected to its highest level since September 2003.

This was the second gigantic leap in the unemployment rate this year, the first being the jump from 5 percent to 5.5 percent in May. And Tony Crescenzi of Miller Tabak, who expects the economy to enter a "dark period" later this year, noted that the unemployment rate has now soared past the Fed's projections of 5.5 percent to 5.7 percent for 2008 and 5.3 percent and 5.8 percent for 2009.

Th dismal jobs report followed a pair of disappointing readings on employment on Thursday: Initial jobless claims rose by 15,000 last week, snapping a three-week declining streak, and ADP payroll service reported that private employers cut 33,000 jobs from their payrolls in August.

That sent the market into a downward spiral, with all three major indexes losing 3 percent or more in Thursday's trading, by far the worst day for the market this week.

(Worried about your own job? Click here to find out what sectors are most at risk.)

Financials were among the big catalysts for the comeback in the market, with Bank of America , AIG , JPMorgan and Citigroup the four horsemen leading the Dow.

Financials were actually the best performer for the week, climbing 1.5 percent, while oil's retreat left energy at the bottom of the pack, sliding 7.4 percent.

Crude oil shed 8 percent for the week, ending at a five-month low of $106.23 a barrel. The dollar gained 3 percent against the euro this week, with the euro finishing at $1.423.

Just as crude got its retreat on, stocks decided there were more important things to worry about and the broader market didn't draw inspiration from crude's decline.

In Friday's market action:

Lehman Brothers jumped 6.8 percent after Blackstone Group and KKR expressed an interest in buying parts of Lehman's real-estate asset-management division. A slew of names have been bandied about this week as potential suitors for all or some of Lehman, including HSBC, Mitsubishi UFJ Financial Group and Korea Development Bank.

Merrill Lynch ended up 2 percent. The stock had skidded earlier after Goldman Sachs slashed its forecastand cut its rating on the brokerage to "sell," saying it sees a fresh wave of writedowns coming.

In addition to the jobs report, the market was buzzing about some M&A news.

Altria is in advanced talks to buy UST, the maker of the popular Skoal and Copenhagen smokeless tobacco brands, for more than $10 billion, the New York Times reported. UST shares surged 25 percent.

SanDisk soared 31 percent following news that Samsung Electronics, the world's top maker of memory chips, might buy the flash-memory-card maker.

However, the SanDisk news wasn't enough to perk up the tech sector, where the warnings continue to pile up.

Dell started this latest round of warnings last week when it issued disappointing results and warned of a global slowdown. Its shares ticked higher Friday following news that the computer maker plans to sell its computer factoriesaround the world in order to cut costs and improve its profitability.

Nokia tossed its hat in the ring, warning that its market share is going to take a hitin the third quarter amid softness in the global economy and tough competition. Analysts said Nokia, the world's top mobile-handset maker, hasn't been as aggressive with pricing as some of its competitors. American depositary shares of Nokia dropped 7.6 percent.

Also issuing profit warnings this week were networking-gear maker Ciena and Corning, the world's largest maker of glass for liquid-crystal displays for televisions and computers. The CEO of chip maker Qualcomm that the company is seeing signs of users slowing their cellphone upgrades.

Next week is going to be light on the economic news and there are no major earnings reports due out.

But get your GPS (to orient yourself) — and your wallet — out.

"There will be a turnaround and strength next week," Areto said. "Not as powerful as the rest of the month but next week will be a kick start."

That could be true: With all the global weakness chatter around the market, the U.S. looks like it will be the first to emerge from the slump and therefore, there could be some good plays in U.S. stocks.

Can you hear the echo from the Olympics?

U-S-A! A ... A ...

ON TAP FOR NEXT WEEK:

MONDAY: Consumer credit; Fed's Fisher speaks
TUESDAY: Pending-home sales; wholesale trade
WEDNESDAY: Weekly mortgage applications; crude inventories
THURSDAY: Import/export prices; international trade; weekly jobless claims; Treasury Budget
FRIDAY: Producer prices; government reading on retail sales; business inventories; consumer sentiment

Send comments to cindy.perman@nbcuni.com.