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Energy Saps Market; Banks Off, Wal-Mart Up

Wall Street suffered through another rough day Monday, with stocks dropping more than 1 percent on worries over the effect the European debt crisis would have on the global economy.

U.S. crude oil prices slipped amid the growth concerns, pulling down shares of energy companies, while banks shares also slipped.

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Defensive stocks, utilities in particular, helped limit losses but the major indexes all lost more than 1 percent.

The biggest selling pressure came from cyclicals but was broad-based. All 10 sectors in the Standard & Poor's 500 went negative. Energy and financial stocks fell more than 2 percent each, while consumer staples and utilities suffered the least damage.

The impetus for the market's aggressive selloff, which comes after last Thursday's 251-point drop in the Dow, was the familiar fear that the euro zone was on the cusp of imploding.

"What's driving the trade is the dawning recognition that the euro zone is fatally flawed and it's dragging down the rest of the world economy with it," said Walter Zimmerman, senior technical analyst at United-ICAP in Jersey City, N.J. "For a while now the problem in Europe has been blindingly obvious everywhere except Europe."

On the major indexes, Wal-Mart was the only positive stock of the Dow industrials. Banks took a beating, with Bank of America leading the parade of red numbers. Intel and Caterpillar each shed more than 2 percent.

The KBW Bank Index dropped 2.7 percent while the Dow Transportation Index lost 1.9 percent.

Commoditiesoffered a rare bright spot in the market. The Reuters/Jefferies CRB Index gained 1.1 percent largely on the strength of metals, including gold and silver as well as grains, where wheat posted the biggest rise.

However, a drop in oil prices took down energy stocks, with majors such as Chevron and Halliburton sustaining losses. U.S. light, sweet crude was alone among the energy declines, with the rest of the complex gaining.

Safe-haven Treasurys surged in price, sending the benchmark 10-year yield down to 1.62 percent as some bond marketexperts predicted yields would continue to slide.

The CBOE Volatility Index , which measures options activity as a gauge of investor fear, surged as much as 15 percent.

Not all of the sentiment was as negative, with bulls arguing that the selling has been overdone and creating an opportunity.

"The negative viewpoint to equity exposure remains a crowded trade," John Stoltzfus, chief market strategist at Oppenheimer, told clients. "We continue to see the glass half full if not more so as accommodative monetary policy, strong corporate balance sheets and persistent (though modest) improvements in housing, mortgage insurance, jobs, and stateside business sentiment tip the scales in favor of a positive outcome beyond the day to day drama currently in the markets."

Market volume surged in the final hour of trading, closing with some 3.3 billion shares changing hands, about an average day. Breadth was solidly negative, with losers beating gainers 3.4 to 1.

European shares closed lower while Spanish borrowing costs rose on Monday. The euro weakened broadly on investor skepticism that the two-day Summit starting Thursday would make any substantial progress, with the crisis now in its third year and engulfing Spain, the region's fourth largest economy.

But Jim O'Neill, chairman at Goldman Sachs Asset Management, told CNBC that investors ought to be more concerned with issues in the U.S. than in Europe. Elevated weekly jobless claims, he said, are showing that the U.S. economy remains fragile.

"Europe doesn't run the world," he said. There are "lots of other issues going on in the world and it doesn't begin and end with Europe."

Some of the market's losses eased briefly on a report that new home sales in May rose 7.6 percent, or 369,000 units, much better than expectations for 346,000.

Home builder shares nevertheless ultimately ignored the positive data, with the iShares US Dow Jones Home Construction fund, an exchange-traded proxy that tracks the industry, off for the session.

The rise in new home sales, to their highest levels since April 2010, provided a ray of hope in an otherwise gloomy economic picture.

"The key difference between then and now is that, rather than being stimulated by temporary policy support, a more fundamental recovery, driven by record low valuations and improving confidence towards the housing sector, appears to be underway," said Paul Diggle, properly economist at Capital Economics in London.

But with so much uncertainty on the horizon, the expectation is that markets are likely to be volatile through the summer.

"We still believe the global equity markets will trace out a very choppy advance during the second half of the year," said Sam Stovall, chief equity strategist at Standard & Poor's. "As a result, we think investors will continue to drive with their low beams on, being willing to make only short-term investment commitments."

In corporate news:

Kirby Corporation shares plummeted after the marine transportation and diesel engine company cut its second-quarter guidance.

Chesapeake Energy also has found itself under fire again, this time on a Reuters report that the company colluded with Encana to suppress land prices in areas thought to be rich with gas and oil. The report was based on emails between the companies.

Quest Software was among the most positive stories of the day, rising sharply on news that a strategic bidder proposed to buy the enterprise management software producer for about $2.32 billion in cash. The offer topped an earlier bid of nearly $2.17 billion from private investment firm Insight Venture Partners.

Constellation Brands also surged on speculation that it would benefit from Anheuser-Busch Inbev's buyout of Coroner beer brewer Grupo Modelo. Constellation is involved in a joint venture with Grupo Modelo.

Research In Motion, which is scheduled to report quarterly earnings later this week, is considering separating out its handset manufacturing business from its messaging network, according to a report in the Sunday Times.

The paper reported Amazon.com and Facebook could be buyers.