Stocks Drop After Draghi Disappoints

Stocks closed down for a fourth session, but well off their lows, after ECB chief Mario Draghi disappointed markets by not undertaking immediate steps to stabilize the euro zone. While Draghi left the door open for additional policy measures in the coming weeks, investors were expecting concrete actions today after the central banker pledged to "do whatever it takes" to save the euro last week.

S&P 500

The Dow Jones Industrial Average, S&P 500and Nasdaqall fell but closed well off their worst levels. The Dow was down 192 points at the lows.

The Dow lost 92.18 points, or 0.71 percent, to close at 12878.88, while the S&P 500 dropped 10.14 points, or 0.74 percent, to end at 1365.00. The Nasdaq shed 10.44 points, or 0.36 percent, to close at 2909.77.

Alcoa and JPMorgan led the blue-chip decliners. Wal-Mart advanced.

Energy and materials were the weakest S&P sectors, while consumer discretionary gained.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell below 18.

ECB President Mario Draghi said that the central bank may undertake outright open market operationswithin its mandate to help bring down bond yields and that it will design plans over the coming weeks for such measures. This fell short of what the market was looking for after Draghi last week pledged "do whatever it takes" to save the euro. The stumbling block may be reservations from Germany's powerful Bundesbank about ECB bond purchases. The ECB also left its key benchmark interestrate unchanged at 0.75 percent. (Read More: ECB Provides a Little Breathing Space, But No More).

“This was a big disappointment for the market because it was not immediate action,” Marc Chandler, chief currency strategist at Brown Brothers Harriman, said. "All major central banks did nothing but hold out the promise of big action next month.” (Read More: Central Bankers Moving Like Turtles, When Market Wants Hares).

The Bank of England left its monetary policy unchanged as well today despite signs of growing economic weakness. In July, the Bank expanded its buying of government bonds to provide additional stimulus.

Yesterday, the Federal Reserve disappointed investors when it too stopped short of announcing further stimulus measures. The central bank did hint that more stimulus could be forthcoming should economic conditions warrant. (Read More: Should Bernanke Have Done More?).

European marketsfinished sharply lower following the ECB meeting. Spanish and Italian banks tumbled and Spanish 10-year bond yields moved above 7 percent.

"Today's action was a result of the false expectations that Mario Draghi gave the markets last week," Doug Cote, chief market strategist at ING Investment Management, said. "He damaged his credibility with the markets in leading them to believe that one or several policy actions would take place today, including buying Spanish and Italian bonds.” Cote also said today’s inaction shows that the German Bundesbank strongly influences ECB policy.

Despite the sell-off, Cote remains bullish on equities. “We are in a bull market plain and simple,” he said. Cote expects strong corporate fundamentals, helped by growing emerging markets, to trump global risks.

Turning to economic news, factory orders for June fell 0.5 percent versus expectations for an increase of 0.5 percent. Also, the Labor Department reported that initial jobless claims for the week ending July 28 rose to 365,000 from 357,000 the prior week. Economists were looking for initial claims of 370,000. Employers announced 36,855 planned job cuts in July, down 1.9 percent from June, according to a report from consultants Challenger, Gray & Christmas.

The July employment report will be released Friday morning, with economists expecting employers to have created 100,000 new jobs in the month.

After a computer glitchat brokerage firm Knight Capital Group sparked volatile trading in 140 individual stocks at the open on Wednesday, the firm said today that it will see a pre-tax loss of approximately $440 million. While the company's capital base was severely impacted, Knight said its broker/dealer subsidiaries are in full compliance with their net capital requirements.

Knight said in a press release that the issue was related to its installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market. Knight said clients were not negatively affected by the erroneous orders.

Retailers reported healthy monthlysame-store sales as warm weather and discounts lured U.S. shoppers to the stores. Gap posted better-than-expected July comparable store sales and said it sees second-quarter results above current Street forecasts.

Same-store sales at Target , TJX and Macy's were also better than anticipated.

Abercrombie & Fitch , however, warned that its second-quarter profit will be about half of what analysts had been expecting, as it experiences a double-digit drop in same-store sales.

In earnings news, General Motors earned 90 cents per share for the second quarter, 16 cents above estimates, but revenue fell slightly short of forecasts.

Life insurer MetLife reported second-quarter earnings of $1.33 per share, beating estimates. The insurer was able to negate the effects of low interest rates through its use of derivatives.

Also, Prudential Financial earned an adjusted $1.34 per share for the second quarter on better-than-expected revenues.

Yelp reported a second-quarter loss of 3 cents per share, narrower than the 6 cent loss analysts were expecting. Revenues beat forecasts, and the customer review website operator raised its revenue forecast for the remainder of 2012.

Gilead Sciences shares benefited from news Bristol-Myers Squibb encountered a safety issue in a mid-stage trial for its experimental hepatitis C treatment. Bristol is Gilead’s closest competitor in the race to market the new kind of hepatitis C treatment. Separately, one of Bristol-Myers Squibb's executives, Robert Ramnarine, was charged with insider trading.

Earnings tomorrow include Procter & Gamble , Toyota Motor and Viacom .

Coming Up Friday:

Employment situation, ISM non-mfg index; Earnings from P&G, Toyota, Beazer Homes, NYSE Euronext, Berkshire Hathaway

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