Stocks Tumble on Financial Fears

Major indexes slumped Friday, with the Dow skidding below 12,000, amid worries about the health of large banks and other financial firms

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Major U.S. stock indexes dropped sharply Friday amid more worries about the financial sector.

The Dow Jones Industrial Average fell below the symbolic 12,000-level, and market experts said major indexes may be poised to test lows not seen since the collapse of Bear Stearns in March.

"Fear is right under the surface," says Morgan Keegan chief technical strategist John Wilson.

On Friday, the Dow fell 220.4 points, or 1.83%, to 11,842.69. The broader S&P 500 index lost 24.9 points, or 1.85%, to 1,317.93. The tech-heavy Nasdaq composite index was the worst performer among the major market benchmarks, shedding 55.97 points, or 2.27%, to 2,406.09.

On the New York Stock Exchange, 25 stocks fell for every five moving higher. On the Nasdaq, the ratio was 20 to 7 negative.

The financial sectors' troubles included a dire warning from Merrill Lynch analysts that shares of large regional banks appear to be in "capitulation mode." The report predicted dividend cuts at Bank of America (BAC), SunTrust (STI), Wachovia (WB) and Regions Financial (RF), and slashed earnings estimates by 22% at the big banks amid rising loan losses and reserve building.

Investors were also spooked by rumors that Merrill Lynch (MER) was going to issue a profit warning, though those rumors faded later in the day. Also Friday, Moody's Investors Service downgraded the credit ratings of bond insurers MBIA Insurance Corp. (MBI) and Ambac (ABK).

A stock market rally will be "tough without financials at least beginning to stabilize," Wilson says. "They're such a drag right now."

The auto sector also took a pounding on Friday, with the S&P Automobile index falling 7.63%, after S&P Ratings Services placed its corporate credit ratings on Ford Motor (F), General Motors (F), and Chrysler LLC, on CreditWatch with negative implications. Ford shares dropped 8% after the Associated Press reported that the automaker issued a gloomy financial outlook and said it will delay introduction of its new F-150 pickup truck by two months because of the declining market for the vehicles.

Oil futures, down Thursday on fuel-price hikes by the Chinese government, were up Friday on a report Israel carried out a military exercise simulating an attack on major producer Iran. The market was awaiting a meeting in Jeddah, Saudi Arabia, on Sunday among major oil producing and consuming nations. On the NYMEX, crude oil for July delivery rose $2.69 to $134.62 per barrel. The U.S. dollar and gold prices fell Friday.

Peter Cardillo, chief market economist at Avalon Partners, said Friday's stock declines may have been exaggerated by so-called "quadruple witching," the expiration of a variety of options on the same day.

The market is in a difficult time in the pre-earnings announcement period, when many companies warn investors of earnings shortfalls in a few weeks. "Then, when the actual earnings start coming in, the market starts to focus on the bright spots," Cardillo says.

There were no significant economic reports scheduled for release Friday or Monday. The economic picture remains mixed before the Federal Reserve's two-day policy meeting begins on Tuesday. Policymakers are expected to leave the U.S. benchmark interest rate unchanged at 2.0%.

Apart from the Fed meeting, the U.S. economic calendar is fairly lively next week, notes Action Economics. The S&P/Case-Shiller Home Price Index is predicted to fall to 168.8 in April from 172.2 in March on Tuesday, while June consumer confidence seems destined to remain at low ebb at 57.0, a 16-year low.

MBA mortgage stats are due Wednesday, followed by a likely 1.