Stocks slumped Thursday, pushing the technology-loaded Nasdaq down almost 3% after an explosive rally a day earlier ran out of steam.
The decline eroded about one-third of the prior session's gains, which had been sparked by better-than-expected earnings from high-tech bellwether Cisco Systems.
"It was logical that we would give up some ground. There is nothing to justify going higher in the short term," said Peter Coolidge, senior equity trader at Brean Murray & Co. "We might have gotten ahead of ourselves. We need to see more things like Cisco to start to form a pattern and to reaffirm that things are picking up."
Stocks fell after Israel gave the green light for military reprisals following a Palestinian suicide bombing Tuesday. Disappointing sales in April from leading retailer Wal-Mart Stores helped add to concern that Wednesday's rally may have been overblown.
Selling accelerated late in the session and indexes closed at the lows of the day. The blue-chip Dow Jones industrial average sagged 104.41 points, or 1.0%, to 10,037.42. On Wednesday, it surged 3.1%.
The broad Standard & Poor's 500 index lost 15.84 points, or 1.5%, at 1,073.01, after climbing 3.8% the day before. The Nasdaq composite index fell 45.80 points, or 2.7%, to 1,650.49, after raking in a 7.8% gain a day earlier.
Losers outnumbered winners by about 2 to 1 on Nasdaq and the New York Stock Exchange. Trading was moderate, well below Wednesday's heavy volume.
Stocks also were pressured after the Federal Reserve said it found anthrax traces in some of its mail, but the markets regained lost ground after an official said the test may show a "false positive" or cross-contamination from earlier incidents. Last year, five people died from anthrax spread through the mail.
Treasury yields fell and gold shares gained as investors returned to safe havens. Some analysts shrugged off the market's declines after such a tremendous rally, but few expected smooth sailing up ahead. Investors, battered by weeks of sell-offs in the market, remain skittish about corporate accounting issues, Wall Street scandals and the dicey outlook for corporate profits.
"We expect more volatility in the market," said John Hendricks, vice president, trading and strategy group, at State Street Global Markets. "We see a tug-of-war between the short-term traders and the longer-term investors that may have perceived the lows on Monday and Tuesday as a temporary bottom or an opportunity to put cash to work."
Cisco dropped 52 cents to $15.75 after racing 24% higher on Wednesday on earnings that more than tripled and a cautiously optimistic outlook. Other technology shares lost ground after their hefty rally on Wednesday. Microsoft fell $2.85 to $52.12, Intel lost 74 cents to $28.24 and software maker Oracle declined 67 cents to $8.48.
Wal-Mart weighed on the Dow, losing $1.40 to $54.99. Sales at stores open at least a year grew 3.3% in April, the world's largest retailer said. But analysts had expected Wal-Mart to report a same-store sales gain of 3.9%.
Some apparel stocks bucked the downward trend. Federated Department Stores jumped $1.80 to $41.39 and AnnTaylor Stores gained $2.02 to $48.17 after the retailers boosted earnings outlooks.
In other market highlights:
* A new share offering received a warm welcome on Wall Street. Shares of the largest movie theater chain, Regal Entertainment, jumped $2.75, or 14%, to $21.75 in their first day of trading. The Colorado-based company, controlled by billionaire Philip Anschutz, raised $342 million in the first initial public offering by a movie theater chain in five years.
* After the close of trading today, American Standard, the maker of plumbing fixtures and Trane air-conditioning systems, will replace Internet consultant Sapient in the S&P 500 Index. Sapient, whose shares have dropped 85% in the last year, is being removed from the index for "lack of representation," S&P said.
In another change, Irvine-based Intersil, a maker of chips for wireless networks and personal computers, will replace DSP Group in the S&P MidCap 400 index.
Shares of companies that are added to Standard & Poor's indexes often rise because managers of funds that track those indexes need to acquire them for their portfolios.
* Brokerage stocks fell after UBS Warburg analyst Diane Glossman lowered estimates and price targets for Lehman Bros., Merrill Lynch and Morgan Stanley Dean Witter. She cited continued weakness in mergers, trading and underwriting securities.
Merrill lost $1.04 to $42.91, Lehman slipped 65 cents to $63.85, J.P. Morgan Chase dropped $1.14 to $35.77, and Bear Stearns fell 48 cents to $62.15. Morgan Stanley added 1 cent to $48.50.
* Gold stocks rose as investors sought defensive shares and the metal's price climbed $1.30 to $309.80 an ounce in New York, near a two-year high. Barrick Gold rose 51 cents to $21.30. Newmont Mining, the biggest producer, advanced 65 cents to $29.55. Newmont is the third-best performer in the S&P 500 this year, up 54%.
Market Roundup, C4-5