The Dow and the S&P 500 fell for a third day on Tuesday after disappointing figures from Wal-Mart and Hewlett-Packard, although a late rebound suggested investors may be looking for a short-term bounce.
Both the S&P 500 and Nasdaq dipped below their 50-day moving averages, but those levels appeared to bring in buying interest.
Recent weakness in sectors tied to economic growth and the sharp decline in commodities have spurred talk of a prolonged pullback. Short-term traders see an opportunity, judging by late gains in certain energy names and financials' strong performance on Tuesday.
The cyclical stocks are easy to buy out there. We're not having any trouble buying them for clients, said Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets in Cleveland.
There will be a tradable bounce, but it still feels like they are under distribution, he said, using traders' parlance for selling.
Lately investor concern has centered around lackluster economic figures. Wal-Mart Stores Inc
Earnings from blue chips as well as data are showing evidence of an economic slowdown, said Chad Morganlander, a portfolio manager at Stifel Nicolaus & Co in Florham Park, New Jersey. Early evidence of deterioration within the U.S. consumer is showing in numbers from Hewlett-Packard and Wal-Mart.
HP, the world's largest technology company, tumbled 7.3 percent to $36.91 after cutting its forecast due to problems stemming from Japan's earthquake and soft PC sales.
Both housing data and industrial production slowed, adding to evidence that the economy is hitting a soft patch.
Action was volatile as stocks fluctuated with currency and commodity prices.
Tech stocks fell as investors sold recent winners due to unease about pockets of weakness in the U.S. economy. The PHLX semiconductor index <.SOX>, composed partly of suppliers of desktop computer chips, dropped 1.2 percent.
The Dow Jones industrial average <.DJI> dropped 68.79 points, or 0.55 percent, to 12,479.58. The Standard & Poor's 500 Index <.SPX> dropped a mere 0.49 of a point, or 0.04 percent, to 1,328.98. But the Nasdaq Composite Index <.IXIC> gained 0.90 of a point, or 0.03 percent, to 2,783.21.
Some analysts have pointed to oversold conditions in the stock market's cyclical areas such as energy, materials and industrials, which they say are primed for a short-term bounce.
An oversold trading rally appears poised to develop for cyclicals, but a sustained multi-month outperformance trend is unlikely to develop until the third quarter, wrote Robert Sluymer, a technical analyst at RBC Capital Markets.
However, caution dominated much of the day's trading with the S&P's industrial sector index<.GSPI> down 1.3 percent, pressured by Dow component Caterpillar
Financial stocks gained, with KBW Bank SPDR, an exchange traded fund
Data showed U.S. housing starts and permits for future home construction fell in April, pointing to prolonged weakness in the housing sector while the Federal Reserve reported factory output slumped in April as an automobile parts shortage hurt production.
The PHLX housing sector index <.HGX> declined 1 percent. Forest product company and homebuilder Weyerhaeuser Co
Commodity-related stocks also lagged as the dollar rose on concerns about a Greek debt restructuring. The S&P materials index <.GSPM> fell 1.1 percent and the S&P energy index <.GSPE> dipped 0.2 percent.
A rise in the greenback reduces the appeal of dollar-priced commodities, which become relatively more expensive. Worry over European sovereign debt is giving investors a reason to make a flight to safety to the U.S. dollar.
Shares of defensive companies, however, continued to outperform. The S&P utilities sector's index<.GSPU> rose 0.7 percent, boosted by a 3 percent gain in the shares of American Electric Power
(Editing by Jan Paschal)