Stocks declined Tuesday as more layoffs and lowered outlooks zapped the momentum out of the recent rally.
The Dow Jones Industrial Average shed 242.85, or 2.7 percent, to close at 8,691.33, essentially giving back most of the prior session's gains. The S&P 500 index lost 2.3 percent and the Nasdaq shed 1.6 percent.
Many investors had hoped the rally of the past two sessions, which saw the Dow gain more than 500 points,would be the start of a sharp Santa rally, but high levels of volatility kept market participants fearful of further declines.
"If we just get some sideways action for a little bit of time here then as we go into 2009 that will be a good time to jump back into stocks," Rob Morgan, president of Dearden, Maguire, Weaver, and Barrett, told "Worldwide Exchange."
One bit of bright new came from, of all places, the real-estate sector. Pending U.S. home sales, which reflect contracts signed, slipped by a smaller-than-expected 0.7% in October, the National Association of Realtors said.
"This is modestly encouraging," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients. "The bottom line seems to be that the vulture investors who have supported the market in recent months are still active; the plunge in mortgage rates should bring in more buyers over the next few months," he said.
FedEx shares tumbled 15 percent, making it the biggest decliner on the S&P 500, after the package-delivery service slashed its fiscal 2009 outlook, saying, "significantly weaker macroeconomic conditions are expected to offset the benefits from lower fuel prices and the announced departure of DHL from the U.S. domestic package market."
Shares of rival package-delivery service UPS fell 7 percent.
Texas Instruments clipped its earnings and revenue forecast amid a dropoff in demand for chips, used in everything from cellphones to industrial equipment.
This came after its biggest customer, handset maker Nokia , issued two warnings about cellphone demand in the past three weeks.
Smaller chip makers Broadcom and Altera also issued warnings of weak demand this week.
"Conditions (are) likely to get worse before they get better," TI's head of investor relations Ron Slaymaker told analysts on a conference call.
But chip stocks rallied: Texas Instruments up 5 percent and Dow component Intel up 2.6 percent.
Negotiators tried to finalize short-term loans for auto makers, to stave off liquidity issues and avert bankruptcy. The loans, which could run to $15 billion of government money, would be given on the guarantee of an industry overhaul.
But shares of General Motors and Ford declined after both stocks rallied more than 20 percent on Monday.
Wal-Mart shares lost 3 percent after the discount giant, expected to be the star of the holiday season as consumers cut back, suspended its stock buyback program citing the "the current economic environment and instability in the credit market."
Rival Target halted its buyback program in November.
>> Track how the holiday season is shaping up for retailers atCNBC's Holiday Central.
American depositary shares of Sony rose 2.3 percent after the Japanese television and gadget maker reported plans to slash 16,000 jobsfrom its payrolls and cut costs by $1.1 billion a year.
Analysts said more cuts may be needed to save Sony's sprawling empire, which has fallen behind Apple with music players and seen flat-panel TV sales slide.
Feeling the pinch of flat TV sales, Corning , the largest maker of glass for those flat-panel screens, said it was considering permanent plant closings and more job cuts. The company said it expects to cut glass prices at a higher rate than usual during the first quarter but wasn't specific. Corning shares skidded 2.2 percent.
The news from Sony and Corning comes a day after Korean electronics giant Samsungslashed its sales and earnings targetas well as capital expenditures. The company, which is the world's largest maker of memory chips and LCD screens, said profit markets have also "vaporized" for its LCD business and weren't sure how long the downturn would last.
Forrester slashed its outlook for 2009 technology spending to 1.6 percent from 6.1 percent, saying the recession will likely last longer than previously expected.
"The question for the U.S. tech market is no longer whether the U.S. economy is in recession. Instead, it is how long and deep the recession will be and how much damage will it do to the tech sector," Forrester analyst Andrew Bartels said in a research note.
In other predictions, the Institute for Supply Management said it expects U.S. manufacturing will contract again next year but that the service sector will grow slightly.
Bond prices advanced and some yields fell below zero amid unprecedented demand. The U.S. Treasury Department said it sold four-week bills at a high rate of zero percent, a level never before seen, in a $30 billion auction. When Treasury bill rates turn negative it shows that investors are so concerned about the safety of other assets that they are willing to effectively pay the U.S. government a fee to look after their money.
-- Reuters contributed to this article.
WEDNESDAY: Weekly mortgage applications; wholesale trade; weekly crude inventories; House hearing on TARP; Treasury budget
THURSDAY: Two-day European economic summit begins; Import/export prices; trade deficit; weekly jobless claims; weekly natural gas inventories; Fed's Stern speaks; Earnings from Ciena, Costco
FRIDAY: PPI; retail sales; consumer sentiment; business inventories
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