Stocks ended a second week of losses on a down note Friday, reflecting growing worries that stocks are on the precipice of a pullback.
Concern about slowed growth worldwide, the coming end of a supportive Federal Reserve policy and the fear of a worsening euro-zone debt crisis are undermining the stock market's ability to maintain an upward direction.
This sentiment was present not just in stocks but also was reflected in a sharp drop in the euro. Stocks and the euro have been trading in a similar pattern for most of the week and particularly on Friday, when a late-morning drop in stocks coincided with a sharp fall in the euro.
Financial stocks took the biggest hit, with the S&P Financial Index <.GSPF> falling 1.5 percent.
Recent heavy selling in commodities has prompted several money managers to forecast a pullback by stocks, noting that much of the stock market's latest advance has been built on commodity-related stocks.
I think this is the first thrust in what's likely to be a correction in the stock market, said James Dailey, a portfolio manager at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.
But the epicenter of that correction is likely to be in what's already been correcting most severely, which is the commodity-related area.
The Fed's second round of quantitative easing has been credited for much of the strength in stocks and commodities since September 2010. The $600 billion bond-buying program is set to end in June.
QE2 was perceived to be a big help from a stimulative standpoint, and markets have reacted very favorably to that, said Natalie Trunow, senior vice president and chief investment officer of equities at Calvert Investment Management Inc in Bethesda, Maryland, which manages about $14.8 billion.
It is also apparent the Fed is unlikely to proceed with QE3, so as QE2 stops that signifies an effective tightening, she said.
The Dow Jones industrial average <.DJI> ended down 100.17 points, or 0.79 percent, at 12,595.75. The Standard & Poor's 500 Index <.SPX> finished down 10.88 points, or 0.81 percent, at 1,337.77. The Nasdaq Composite Index <.IXIC> fell 34.57 points, or 1.21 percent, at 2,828.47.
For the week, the Dow was down 0.3 percent, the S&P 500 was off 0.2 percent and the Nasdaq was barely up at 0.03 percent.
Dailey said because of a weaker outlook for global industrial demand, his firm is lightening up or hedging position in commodity-related areas, including industrial metals.
He sees a stock market correction of between 6 percent and 8 percent from the highs in the Dow and S&P 500.
The CBOE Volatility Index <.VIX>, used as an indicator of investor fear, ended up 6.5 percent.
In another sign of a shift in sentiment, leadership in the S&P 500 has moved from cyclical sectors like energy and basic materials to sectors with more stable growth like healthcare and utilities.
The S&P energy index <.GSPE> was down 1.4 percent for the week, and down 8.3 percent for the month to date, while the iShares Silver Trust exchange-traded fund
Technology shares were also among the hardest hit in the session. Yahoo Inc
About 6.88 billion shares were traded on the New York Stock Exchange, NYSE Amex and Nasdaq, compared with the average of 7.73 billion so far in 2011.
Declining stocks outnumbered advancing ones on the NYSE by about 7 to 3 and on the Nasdaq by a ratio of about 10 to 3.
(Reporting by Caroline Valetkevitch; Editing by Kenneth Barry)