The correction may finally be starting: Stocks plunged more than 2 percent Monday as traders cashed in on some of the gains from the four-week rally.
The selloff started overseas, with Chinese stocks tumbling nearly 6 percent. Other Asian markets losing more than 3 percent, and major European indexes lost more than 2 percent.
The Dow Jones Industrial Average shed more than 180 points, or 2 percent, to close at 9,135.34. It was the index's biggest point and percentage decline since July 2. The S&P 500 lost 2.4 percent and the Nasdaq tumbled 2.8 percent. The VIX, the best gauge of fear in the market, jumped 14 percent, finishing just shy of 28.
There has been a growing chorus of market pros who say the market got way ahead of itself, the rally of the past month was founded on nothing and a correction is coming.
“There’s no basic foundation for the run-up we’ve had, been far too rapid," Dan Deighan, founder of Deighan Financial Advisors, told CNBC today. He predicts we're going to see a 25 to 50 percent dropin the market — and it's going to be fast.
This echoed comments on Friday by Pimco's Mohamed El-Erian, who said, "Stock investors are making overly optimistic assumptions" and that "[c]urrent valuations are not warranted by the outlook for 2010."
But Bruce McCain, chief investment strategist at Key Private Bank, said this is a normal correction and investors shouldn't panic.
McCain says, this correction will likely be 10 percent at best — say, bringing the S&P to 900 from 1,000 — and will be over in a few months. Then, stocks will start to go back up.
"A substantial portion of this rally is still yet to come," McCain said. "We're cautioning clients not to sit on the sidelines too long — to push ahead of their comfort level" so they don't miss out on the rally when it picks up again.
"We feel pretty confident telling our clients to make sure they're fully invested," McCain said. "As we get to the end of the year, we'll watch the trends and maybe pull back a bit," he explained.
Signs of a correction started last week, when stocks snapped a four-week rally that had pumped up the Dow by 15 percent.
Investors shrugged off another encouraging economic data point: The New York Fed reported its measure of manufacturing activity in the region moved into positive territory— signaling growth — for the first time since April 2007.
Financials sold off as several companies, including Bank of America and Capital One , said credit-card defaults rose in July.
The market was also buzzing about the Fed's decision to extend the TALF another six months, which means through June 2010, as the credit market remains "impaired."
Bank of America was one of the top three drags on the Dow, along with Alcoa and Caterpillar , which each lost more than 4 percent.
There were only two gainers on the Dow — Pfizer and Coca-Cola .
Lowe's, the number two home improvement retailer, added to the market's poor mood after reporting its profit plunged 19 percent, much worse than estimates.
Lowe's shares skidded more than 10 percent, making them one of the biggest decliners on the S&P 500, along with Liz Claiborne and Abercrombie & Fitch.
Over on the Nasdaq, the hardest hit of the indexes, UAL, Electronic Arts and Wynn Resorts were among the biggest decliners, all down more than 8 percent.
Lowe's rival Home Depot saw its shares tumble ahead of its earnings, due out before the bell Tuesday.
Shares of BJ's Wholesale Club fell after J.P. Morgan Securities downgraded the stock to "neutral" from "overweight."
Retail has been in the spotlight after a disappointing retail-sales report from the government last week and investors look to the back-to-school shopping season for indications of how the economy is doing.
Volume was light, with 1.22 billion shares changing hands on the New York Stock Exchange. Decliners outpaced advancers, roughly 9 to 1.
On Tap for Next Week:
TUESDAY: Housing starts; PPI; Earnings from Home Depot, Saks, Target, TJX, HP and Analog Devices
WEDNESDAY: Weekly mortgage applications; weekly crude inventories; Earnings from Deere, Limited
THURSDAY: Weekly jobless claims; leading indicators; Philly Fed survey; Earnings from Gamestop, Hormel, and Sears
FRIDAY: Existing-home sales; Earnings from JM Smucker
Send comments to cindy.perman@nbcuni.com.