Stocks Stomped in Financial Freefall

Another washout overtook Wall Street Thursday, sending major averages down as much as 7 percent as traders bailed out of the credit-battered stock market.

The market's afternoon selloff sent the Dow below 9,000 for the first time in five years, as unshakeable fears from the credit freeze combined with the expiration of short-selling rules to beat down stocks for the seventh straight day.

Selling grew downright feverish in the final hour as exasperated traders described an air of hopelessness and questions circled over what the market's capitulation selloff point might be.

"This is a disaster, I can't put it any other way. You would think capitulation would have been the 1,300-point loss in the first three days this week," said Dave Rovelli, managing director of US equity trading at Boston-based Canaccord Adams. "No one wants to own stocks. ... It's just constant negative energy."

With no end to selling in sight, there were more calls for action by policymakers.

"We need to get some traction at some point in time here to get some sort of rally," BlackRock Vice Chairman Bob Doll said on CNBC. "We've been in this freefall zone, and the Fed's going to have to get bigger, bolder and in front of things I'm afraid."

Responding to an on-air question, Doll agreed the stock market had crashed.

Technology shares were the least hard-hit but still heavily damaged.

The Dow roared past a 7 percent loss, with the worst damage coming in areas with any connection to the financial sector, though all 30 issues in the bluechip index fell. The index was off 37 percent from its all-time high a year ago today.

Banking issues were trashed as industry leaders continued an unwillingness to lend with Libor and credit spreads growing. There also were whispers that shorts were taking aggressive positions in some leading financials.

Morgan Stanley shares tumbled amid pessimism surrounding the broker-bank's looming earnings report and doubts over the status of a planned $9 billion investment by Japan's top bank, Mitsubishi UFJ Financial Group. There was speculation that the end Wednesday of a ban on short-selling financials helped spark the Morgan Stanley selloff, while the company's mortgage-default costs rose today as well.

At the same time, all three companies involved in the latest bank takeover bid -- the battle between Citigroup and Wells Fargo to acquire Wachovia -- got hammered as uncertainty also surrounded that deal.

Elsewhere, General Motors shares hit levels not seen since 1950 and was put on credit watch negative, while Ford also was down sharply. The leading automakers have been saying the credit freeze will take a chunk out of their sales. There was speculation that the short-selling expiration was hitting those companies as well.

In addition to GM, Standard & Poor's lowered its outlook on Dow component Alcoa to negative due to falling aluminum prices and weakened markets.

The CBOE Volatility Index turned course after being lower for most of the day, posting an intraday record and soaring past 60, about twice the level where stocks are considered highly volatile. But some analysts pointed out that spikes in the fear index don't necessarily mean capitulation.

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The selling even infected International Business Machines , which said third-quarter net income rose 20 percent to $2.8 billion, while earnings per share from continuing operations rose 22 percent to $2.05, against analyst estimates of $2.01.

IBM, which helped drive an opening-bell rally, zigzagged through the day, making substantial moves both higher and lower, before settling in negative territory.

Tech Ultimately Vanquished

Nasdaq leaders Apple and Microsoft helped temper losses as the tech gauge fought for higher ground through most of the day. But even they couldn't withstand the selling tsunami that enveloped the market.

The banking and credit worries, which were not allayed by Wednesday's coordinated global central bank rate cuts, were what truly overwhelmed trading.

"Moves like what the Fed has done actually show a lack of confidence in the market and it says that we need to continue to shore up the banking system and we aren't there yet," Steven Sanders, of First Genesis Financial, said on CNBC. "So the initial interpretation of this should probably drive markets down. I think when we begin to look at about six or seven months down the road we will show that this was a very healthy sign for us." For Sanders' full analysis, see video.

Meanwhile, American International Group got slammed as did the rest of the sector, even though it could get nearly $38 billion more under a program announced by the Fed in addition to the $85 billion government loan it got last month.

Under the new plan, the Federal Reserve Bank of New York will take up to $37.8 billion in investment-grade, fixed-income securities from AIG in exchange for cash.

AIG led Dow losers, with the bluechip index as well as the Standard & Poor's 500 hampered overall by jitters surrounding the insurance industry.

While MetLife shares rebounded after a huge selloff Wednesday on the firm's preannouncement of bad earnings and an even worse outlook, both Prudential Financial and XL Capital plummeted.

A pair of economic reports had little impact on markets; both weekly jobless claims and natural gas inventories were in line with estimates.

© 2009 CNBC.com