Market Snapshot October 7, 2008, 5:15PM EST

Stocks Keep Spiraling Down

A fifth straight day of losses ends with the Dow down 508 points, the S&P 500 under 1,000, and markets facing their worst year since 1937

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When will the selling stop? That's the mystery.

Economic and credit worries sent U.S. stocks spiraling down for a fifth straight session Tuesday. The Dow Jones Industrial average lost another 508 points, while the broader S&P 500 index fell below the key 1,000 mark.

Tuesday's declines bring the Dow's loss for 2008 to almost 29% -- making it the worst year since 1937's decline of 32.8%. The S&P 500 is now down 32% -- also the worst drop since 1937, while the Nasdaq has lost nearly 34% this year. The markets still have a ways to go to beat the worst year of the Great Depression, 1931, when the Dow fell 52.7% and the S&P 500 plunged 47.1%.

"It's just a downward spiral of fear," says Richard Sparks, senior equities analyst at Schaeffer's Investment Research. He says he had hoped that today's action on the part of the Federal Reserve to buy commercial paper would help the market more than a rate cut that the market hoped for, but the market didn't stay up for long on that news. "The market hates uncertainty, and it's all we have."

Investors are uncertain about whether the financial rescue plan is the right one, if it will be enough to heal the credit markets, how it will affect world economies, and what will happen to corporate earnings, Sparks says. The outcome of the presidential election is another wild card.

Federal Reserve Chairman Ben Bernanke said in a speech Tuesday afternoon that recent economic data and financial developments show the outlook for economic growth has worsened and hinted that the Fed might cut interest rates. Bernanke said economic activity is likely to be "subdued" during the remainder of this year and into next year. He also defended the timing of the central bank's actions to cope with the severe financial crisis. Bernanke told the National Association for Business Economics that the outlook for inflation, while still a problem, has improved somewhat as oil and other commodity prices have eased.

Sentiment was also hurt by a dismal profit report from Bank of America Corp. (BAC), which also slashed its dividend in half and said it would sell shares to raise $10 billion in new capital. Other big financial names like Goldman Sachs (GS) and Merrill Lynch (MER) fell in sympathy. Morgan Stanley (MS) came off session lows after indicating that Mitsubishi UFJ Financial's (MTU) $9 billion investment in the firm is on track to close.

Selling picked up as investors continued to give up on stocks Tuesday. The blue-chip Dow Jones industrial average tumbled 508.39 points, or 5.11%, 9,447.11. The broader S&P 500 index lost 60.66 points, or 5.74%, to 996.23. The tech-heavy Nasdaq composite index dropped 108.08 points, or 5.80%, to 1,754.88, paced by weakness in Google (GOOG), which fell on an analyst downgrade.

On the New York Stock Exchange, 28 shares fell in price for every 4 that advanced. The ratio on the Nasdaq was 24-4 negative.

The Dow's drop below the psychologically important level of 10,000 on Oct. 6, followed by Tuesday's move below 1,000 for the S&P 500, is creating more fear in the market, Sparks says. He believes the VIX, considered a fear index for stocks, has to go even higher than Tuesday's close of 53.78 -- levels not seen since the early 1990s. "We need to have enough fear to have a washout and then build out a base to go higher," he says. He also notes that a bottom for stocks usually doesn't occur until you see more put option contracts (a bet that prices will fall) being bought than call option contracts (a bet that prices will rise). Now, more call options are being purchased than puts, Sparks says.

On the earnings front, the first look at September-quarter results are starting to trickle in. After the market close, Alcoa (AA) reported a 52% drop in third-quarter earnings because of sharply lower prices, weaker demand and higher costs. The aluminum producer said EPS was 33 cents, vs. 63 cents a year earlier (including a net gain of 25 cents for a sale). Revenue edged down 2% to $7.23 billion. Analysts on average were expecting earnings of 50 cents per share and revenue of $7.139 billion, according to Reuters Estimates.

Among industry groups on the move Tuesday, the S&P Other Diversified Financial Services index skidded nearly 13% after the BofA news. The S&P Automobile Manufacturers index was down almost 12% amid concerns about the credit crisis and how it's impacting the economy. Also losing ground: Automotive Retail (-8.3%) and Department Stores (-5.5%).

On the upside, Commodity Chemicals (+13%) was attracting investor attention after recent weakness.