After failing to sustain an initial upward move, stocks moved sharply lower over the course of the trading day on Thursday. The major averages all pulled back firmly into negative territory after reaching multi-month intraday highs in early trading.

The downturn was partly due to profit taking, with traders cashing in on the market's recent gains ahead of the release of the results of the government's stress tests of the nation's nineteen largest financial institutions.

While the results of the stress tests are not likely to provide any major surprises as a result of leaks to the media, traders still expressed some uncertainty about the reaction to the release of the official results after the close of trading.

Additionally, mutual fund manager Axel Merk told RTT News that many of the financial firms determined to have sufficient capital would still not be out of the woods, emphasizing the serious headwinds that are going to have a negative impact on bank balance sheets in the future.

Some additional selling pressure was generated by the release of the results of the Treasury Department's auction of $14 billion worth of 30-year bonds, which attracted below average demand amid record government debt sales.

The Treasury said the auction drew a high yield of 4.288 percent and a bid-to-cover ratio of 2.14. The bid-to-cover ratio, an indicator of demand, came in well below the 2.40 recorded for the previous auction of $11 billion worth of 30-year bonds.

The initial strength in the markets came after the Labor Department released a report showing an unexpected decrease in initial jobless claims in the week ended May 2.

The report showed that jobless claims fell to 601,000 from the previous week's revised figure of 635,000. Economists had been expecting jobless claims to edge up to 635,000 from the 631,000 originally reported for the previous week.

However, the report also showed a continued increase in continuing claims, which rose to a new record high of 6.351 million in the week ended April 25 from the preceding week's revised level of 6.95 million.

Peter Boockvar, equity strategist at Miller Tabak, said, The differential between the two figures is evidence that while the pace of firing has stabilized, there still remains a lack of hiring.

In corporate news, shares of General Motors (GM) ended the session down 3.6 percent after the auto giant reported a first quarter loss of about $6 billion. GM also revealed that it burned through $10.2 billion during the quarter due largely to a 47 percent drop in sales.

The major averages moved off their lows going into the close but remained firmly negative. The Dow closed down 102.43 points or 1.2 percent at 8,409.85, the Nasdaq closed down 42.86 points or 2.4 percent at 1,716.24 and the S&P 500 closed down 12.14 points or 1.3 percent at 907.39.

Sector News

While banking stocks helped to lead the markets higher in early trading, profit taking contributed to a notable turnaround by the sector. The S&P Banks Index ended the session down 7.4 percent after reaching a four-month intraday high.

Within the banking sector, Comerica (CMA) turned in one of the worst performances, with the regional bank closing down 12.4 percent after ending the previous session at its best closing level in six months. Synovus Financial (SNV) and KeyCorp (KEY) also posted notable losses.

Technology stocks also moved sharply lower over the course of the trading day, contributing to the particularly steep loss posted by the tech-heavy Nasdaq.

Among technology stocks, semiconductor stocks saw significant weakness, dragging the Philadelphia Semiconductor Index down 5.9 percent. Micron (MU) helped to lead the sector lower after Deutsche Bank downgraded its rating on the chip maker.

While steep losses by networking and computer hardware stocks also contributed to the weakness in the tech sector, real estate and housing stocks also moved sharply lower on the day.

At the other end of the spectrum, health insurance stocks bucked the downtrend by the broader markets, resulting in a 7.4 percent gain by the Morgan Stanley Healthcare Payor Index. Strong gains by Aetna (AET) and Cigna (CI) helped lift the index to a two-month closing high.

Dow Components

A majority of the Dow components ended the day in negative territory, contributing to the steep loss posted by the blue chip index. Of the thirty Dow components, twenty-one finished the session below the unchanged line.

Caterpillar (CAT) turned in one of the Dow's worst performances, with the construction equipment maker closing down 5.2 percent. Early in the session, shares of Caterpillar reached their best intraday level in almost four months.

Shares of Alcoa (AA) also came under pressure over the course of the trading day after moving higher at the open. The aluminum producer closed down 6.2 percent after it also reached a nearly four-month intraday high.

JP Morgan (JPM), Hewlett-Packard (HPQ), AT&T (T), and America Express (AXP) also posted notable losses, dragging the Dow firmly into negative territory.

On the other hand, Bank of America (BAC) showed a strong upward move, adding to the strong gains posted in the three previous sessions. Shares of Bank of America closed up 6.5 percent, at a four-month closing high.

Notable gains by Merck (MRK) and General Electric (GE) also helped to limit the downside for the Dow. Shares of Merck rose 2.4 percent, while shares of GE closed up 2.1 percent.

Other Markets

In overseas trading, stocks in the Asia-Pacific region extended their recent upward moves, with Japan's benchmark Nikkei 225 Index jumping 4.6 percent. Japanese stocks were playing catch-up after the market was closed for the three previous sessions.

Meanwhile, the major European markets ended the day mixed after seeing considerable strength earlier in the session. While the U.K.'s FTSE 100 posted a modest gain, the French CAC 40 Index and the German DAX Index fell 1 percent and 1.6 percent, respectively.

In the bond market, treasuries saw considerable weakness on the day, with the weak demand for the 30-year bond auction generating some selling pressure. Subsequently, the yield on the benchmark ten-year note closed up 14.3 basis points at 3.295 percent.

Looking Ahead

Trading on Friday is likely to be impacted by reaction to the release of the official results of the government's stress tests along with the release of the Labor Department's monthly employment report. The employment report is expected to show a decrease of about 600,000 jobs.

On the earnings front, AIG (AIG), Nvidia (NVDA), and Allstate (ALL) are among the companies that are scheduled to release their quarterly results after the close of trading today.

For comments and feedback: contact editorial@rttnews.com