Stocks Tumble After Summer Rally

Sellers took over on the first day of September, despite positive news about manufacturing activity and pending home sales

The first day of September was spooky for stocks, as sellers came out in force despite positive economic reports about manufacturing activity and pending home sales. Financial stocks led the way lower, as investors showed "fatigue" after the summer's strong rally.

"Positive economic data is becoming less influential in moving the markets," said Jeffrey Kleintop, chief market strategist at LPL Financial in a research note Tuesday. He believes that "so much of the news of the recovery is now priced into the market," and said that "the market appears to have become saturated with good news and is beginning to show signs of fatigue after rising 52% above the closing low of March 9, 2009."

"This low energy could lead to another period of consolidation much like that which occurred from mid-May to mid-July when the S&P 500 index hovered around 900 for two months," Kleintop wrote.

Also weighing on the stock market may be the beginning of September, a month in which stocks have historically underperformed, says Peter Cardillo, chief market economist at Avalon Partners. The year anniversary of the collapse of investment bank Lehman Brothers is approaching and still fresh in investors' minds. "Today's decline is a reminder of what September can be all about," Cardillo says. "But this doesn't mean this is the beginning of a major correction."

After opening higher Tuesday, the 30-stock Dow Jones industrial average finished down 185.68 points, or 1.96%, to 9,310.60. The broad Standard & Poor's 500-stock index tumbled 22.58 points, or 2.21%, to 998.04. The tech-heavy Nasdaq composite index lost 40.17 points, or 2%, to 1,968.89.

In economic news, the August ISM manufacturing index rose to higher-than-expected 52.9 -- the first reading above 50 in 19 months. The consensus estimate was for a smaller rise to 50.5. Sharp increases in new orders and prices led the index. "The data suggest the manufacturing sector is finally coming out of recession," wrote S&P economist Beth Ann Bovino in a note Tuesday.

July pending home sales rose 3.2% to a two-year high 97.6 in July from 94.6 in June. It was the sixth straight monthly gain. There was some speculation the government's $8,000 tax credit slated to expire in the fall caused some home buyers to accelerate purchases.

But a report on construction spending in July fell 0.2%, weaker than expected. Total construction was down 10.5% vs July 2008. June was revised to a 0.1% increase from 0.3% and May was revised to a 1.3% drop from a 0.8% decline.

Financial stocks got battered Tuesday amid vague rumors about banking troubles. AIG (AIG) aided in today's weakness as the shares continued to retreat from their recent run-up. In addition, S&P Ratings Services said the plans by AIG to sell indirect subsidiary International Lease Finance Corp. has become less clear in the wake of continued delays in the sales process, and there are various indications that AIG may be considering other alternatives. Also, there are reports that Sanford Bernstein lowered its target on the shares of AIG to $10.

Auto stocks also fell after car makers released August sales, with strength reported by Ford (F)(+17% from a year ago, Honda (HMC) (+10%), and Toyota (TM) (+6%). The second round of "cash-for-clunkers" stimulus provided a huge boost to sales in August, likely lifting sales an estimated 4 million units, says Action

Economics. In total, vehicle sales are pegged at 13.3 million units (median), which marks a hefty 23% surge on the month, says Action Economics.

Among other stocks in the news Tuesday, eBay (EBAY) inked a deal to sell 65% stake in its Skype communications unit to an investor group led by Silver Lake and includes Index Ventures, Andreessen Horowitz, Canada Pension Plan (CPP) Investment Board. eBay said it expected to receive approximately $1.9 billion in cash upon the completion of the sale and a note from the buyer in the principal amount of $125 million. It notes the deal, which is not subject to a financing condition, is expected to close in the fourth quarter 2009. Earlier, S&P reiterated hold.

Biovail (BVF) saids top-line results from Acadia Pharmaceuticals' (ACAD) first pivotal Phase III trial with pimavanserin in patients with Parkinson's disease psychosis, or PDP, did not meet its primary endpoint of antipsychotic efficacy as measured using the Scale for Assessment of Positive Symptoms, or SAPS.

Novavax (NVAX) announced favorable results from Phase II human clinical trial of its trivalent seasonal influenza virus-like particle (VLP) vaccine candidate. NVAX says the vaccine was well tolerated and induced robust immune responses against all three influenza strains in the vaccine.

CIT Group (CIT) announced it will not make an interest payment due September 15, 2009 on $750 million in 6.1% subordinated notes due 2067. S&P kept a hold opinion on the stock.

In other markets Tuesday, Treasuries finished mixed after when stocks lost their morning gains. The dollar index was up, and gold was also higher in a flight to safety. Oil futures were down $1.30 to $68.66 on demand worries.

Coming Wednesday is second quarter nonfarm productivity growth, expected to be 6.4%, the same as the advanced reading. Unit labor cost growth is expected to be revised to -6.3% from -5.8%. On a year-over-year basis, productivity continues to hold at an elevated level of 1.8% through the second quarter, while unit labor costs sit at a very weak -0.6%, says Action Economics.

July factory orders are expected to jump 2.3%, while shipments increase 1.2%. Inventories are expected to drop 0.6%.

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