Stocks started September, a typically bad month for the market, with a sharp selloff amid worries about more bank failures and the fact that the market may have gotten ahead of the recovery.
“Last week, we started to see technical signs that the markets were getting tired,” Scott Redler, chief strategic officer at T3live.com, told CNBC. “The technical signs combined with people being more cautious [is] helping fuel this decline.”
The Dow Jones Industrial Average lost 185.68, or 2 percent, to close at 9,310.60. It was the Dow's third straight down day and longest losing streak since June.
The S&P 500 shed 2.2 percent to close at 998.04, and the Nasdaq dropped 2 percent to end at 1,968.89.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, jumped 12 percent to 29.15, its highest level since early July, suggesting traders expect more volatility.
All Dow stocks were lower except Wal-Mart , which eked out a 0.2-percent gain after the discount giant announced this week plans to launch an online marketplaceat Walmart.com, featuring goods from other stores as well as its own flagship Walmart stores.
The big buzz in the market today was about the possibility that another bank default may be coming, which sent bank stocks sharply lower.
Bank of America dropped 6.4 percent, making it the biggest percentage decliner on the Dow, even after the bank said it wants to repay part of its government bailout.
American Express and JPMorgan rounded out the Dow's bottom three.
Citigroup lost 9.2 percent, bringing its two-day total decline to 13 percent. And regional banks took it pretty hard, with Suntrust Bank off 7 percent and Regions Financial down 5.5 percent as well.
Shares of CIT Group fell more than 15 percent after the battered commercial mortgage lender said it would fail to make a Sept. 15 interest payment on notes due in 2067.
The air also continued to come out of AIG's meteoric rally. Shares tumbled another 21 percent today after more than tripling in August.
Traders shrugged off an encouraging report on manufacturing. The Institute for Supply Management said its manufacturing index rose to 52.9in August from 48.9 in July. Any reading over 50 indicates expansion, and this marks the gauge's first return to since January 2008.
Economists pointed out that the ISM jump was largely due to the Cash for Clunkers program and that consumer demand doesn't warrant manufacturing at these levels.
Ford reported its sales rose 21.2 percent in August, helped by Clunkers, but were well short of the 40 to 50 percent analysts had expected. Its shares fell 4.7 percent.
Meanwhile, Chrysler sales tumbled 12.2 percent, after a 3.7 percent rise in July, as the automaker doesn't have as many fuel-efficient vehicles as its rivals, who benefitted more from the Clunkers program.
Other automakers will report sales as the afternoon goes on.The industry is expected to show its first year over year gain in nearly two years, boosted by Clunkers.
Among the day's other economic news, pending-home sales jumped 3.2 percent in July to their highest level since June 2007. It was the sixth straight increase and better than the 2-percent rise economists had expected.
And construction spending slipped 0.2 percent in July, worse than the flat reading economists had expected. This came after a 0.1-percent uptick in June.
As the calendar flips to September, investors will look back on August fondly, the last two trading sessions notwithstanding.
August marked the sixth consecutive month of gainsfor both the S&P 500 and the Nasdaq, and the fifth positive month for the Dow out of six. The Dow and the S&P 500 had their best Augusts in nine years, and the S&P has now gained almost 39 percent over the past six months.
EBay confirmed that it has agreed to sell its Skype Internet-calling service for $2.75 billion to an investor group led by Silver Lake. EBay will get $1.9 billion in cash and retain a 35-percent stake in the company. EBay shares initially rose on the news but finished down 2.1 percent.
Yahoo shares lost 2.9 percent following news that investor Carl Icahn cuts his stake in the company to 4.48 percent from 5.45 percent.
Research In Motion eked out a gain, climbing 0.7 percent, after
Volume was pretty heavy: 1.63 billion shares changed hands on the New York Stock Exchange. Decliners outpaced advancers, roughly 5 to 1.
Still to Come:
WEDNESDAY: Weekly mortgage applications; Challenger and ADP jobs reports; factory orders; weekly crude inventories; Fed minutes
THURSDAY: Chain-store sales; weekly jobless claims; ISM services index
FRIDAY: August jobs report
Send comments to cindy.perman@nbcuni.com.
