NEW YORK (CNNfn) - The Dow Jones industrial average fell to a two-month low Monday as concerns about corporate profitability that had been plaguing the technology sector spilled into many of the "old economy" stocks found on the Dow.
And with little else to focus on ahead of the Federal Reserve's meeting on interest rates, investors had no reason to buy with conviction. The recent spate of corporate profit warnings still weighed on market sentiment, and concern that more may come prompted many to sit on the sidelines.
"What the Fed is doing will limit the downside rather than propel the upside," Jay Pelosky, global strategist with Morgan Stanley, told CNNfn's Street Sweep. "We're getting to that part of the cycle where we are really becoming worried about earnings."
Still, some selling pressure abated in the last hour of trading as bargain hunters emerged. And earlier enthusiasm for technology stocks returned as investors nibbled at select issues.
After falling more than 130 points in Monday's session, the Dow Jones industrial average recouped some losses to end 100.37 points lower at 10,504.22 – its lowest level since mid-April. The Nasdaq composite index waffled throughout the session, gaining 16.03 points to 2,050.87, while the S&P 500 shed 6.75 to 1,218.60.
But analysts said there was little behind the feeble attempt to rebound from the lows of the day.
"It doesn't tell you anything in terms of the fundamentals," Larry Wachtel, market analyst with Prudential Securities, told CNNfn's Street Sweep. "I think there will be a bet made tomorrow (Tuesday) and early Wednesday that the Fed goes 50 basis points (a half-percentage point). If it pays off, I think there will be a trading flurry."
The Federal Open Market Committee, the Federal Reserve's monetary policy-making arm, is expected to cut interest rates for the sixth time this year when it ends a two-day meeting Wednesday. Expectations are split whether there will be a quarter-percentage-point cut or a half-percentage-point rate cut.
With little in the way of other news to provide a convincing catalyst for buying or selling, investors still are on alert for the other shoe to drop in terms of corporate guidance. Uncertainty abounds about how much and when the economy will rebound.
"There's zero catalyst to step into this market and it is this Fed meeting that has people at a standstill," Nick Angiletta, head of retail sales trading with Salomon Smith Barney, told CNNfn's The Money Gang.
Market breadth was mixed but volume was light. Nasdaq winners nudged out losers 11,894 to 1,887 as 1.49 billion shares traded. Declining issues on the New York Stock Exchange topped advancing ones 1,783 to 1,305 to 960 as 1.02 billion shares traded.
In other markets, Treasury securities edged lower. The dollar fell against the euro and the yen.
Waiting for the Fed and economic turnaround
It's time for the Fed again. An interest rate cut is baked into the cake, but there is wide speculation about the size of the cut. Some economists expect a quarter-percentage-point cut, while others are banking on a half-percentage-point cut. A decision is expected Wednesday at 2:15 p.m. ET.
"Until then, investors will jockey for positions, anticipating the market's reaction to the news," wrote Bernie Schaeffer, chairman and CEO of Schaeffer's Investment Research, in a note to clients. "The other anticipated rate cuts were greeted intra day by an initial reaction positive, but followed by a rapid sell-off and subsequent softness in the markets."
Market participants also will tune in closely to the Fed's accompanying statement for signs of how the Fed is reading current economic conditions.
"More important than the rate cut is what they say about the state of the economy – that is going to be critical," said Brean Murray's Coolidge. "It's a double-edged sword. They want to remain vigilant in an economic slowdown yet the rate cuts that have passed should be kicking in by now. And if they're not, then it shows rate cuts, in and of themselves, are just part of the answer."
Abby Joseph Cohen, U.S. chief investment strategist with Goldman Sachs, pointed to three factors keeping investors leery – the pace of economic activity, the Fed's actions, and corporate profitability.
But long-term investors may take some comfort from her view that there is a light on the horizon.
"Our key assumptions are that recession will be avoided, low inflation gives the FOMC ample latitude to pursue stimulative policies, and corporate profits will notably rebound in 2002," Cohen wrote in a note to clients.
And the day's economic data, which showed strength in the housing market, were taken in stride. "Good news is good news," said Art Hogan, chief market strategist with Jefferies & Co. "This is the time we need to hear good news in the economy."
Existing home sales rose 2.9 percent in May to an annual rate of 5.37 million units, according to the Commerce Department, beating expectations for no change and up from April's 5.2 million units.
Blue chips take a hit while techs waffle
With little on the corporate news front, investors found more reasons to sell than buy.
Dow component Home Depot (HD: down $1.71 to $49.00, Research, Estimates) led the selling on the blue chip index after a story in Barron's over the weekend suggested that the home improvement retailer is in a vulnerable earnings position.
The story points out that Home Depot has reached such rich valuations that the slightest disappointment, whether due to the economy or the pace of its own expansion, could bring out the sellers.
And another Dow component, Honeywell International (HON: down $1.00 to $35.60, Research, Estimates), gained attention from news that the European Union advisory committee backed European Commission experts Monday and opposed General Electric's (GE: down $1.61 to $50.25, Research, Estimates) move to buy the manufacturing conglomerate.
The committee then unanimously asked the Commission to talk further with the companies, a knowledgeable source said.
With the uncertainty about an economic recovery spreading into the blue chips, Caterpillar (CAT: down $2.00 to $52.65, Research, Estimates), Alcoa (AA: down $1.10 to $38.00, Research, Estimates), and Eastman Kodak (EK: down $1.86 to $46.97, Research, Estimates) also retreated.
But Coca-Cola (KO: up $0.74 to $43.59, Research, Estimates) bucked the trend after Goldman Sachs upgraded it to "recommended list" from "market outperform" while cutting its earnings estimate to $1.58 a share from $1.60 for 2001.
While the tech-heavy Nasdaq floundered, tech bellwethers still held modest gains.
The buying was led by Intel (INTC: up $1.07 to $28.58, Research, Estimates), Cisco Systems (CSCO: up $0.99 to $18.51, Research, Estimates), Oracle (ORCL: up $0.29 to $17.77, Research, Estimates) and Yahoo! (YHOO: up $2.46 to $19.77, Research, Estimates).
But selling in Microsoft (MSFT: up $0.02 to $68.85, Research, Estimates), Qualcomm (QCOM: up $0.32 to $54.35, Research, Estimates) and WorldCom (WCOM: down $0.33 to $13.96, Research, Estimates) countered the gains.
"We're certainly not convinced that stocks are either pricey or inexpensive here," Hogan said. "So you're not getting anyone jumping in one way or another."
Corporate news
Compaq (CPQ: up $0.40 to $13.90, Research, Estimates) plans a huge overhaul that will see it offer packages of computers, software and services instead of just hardware. Compaq also will announce new cost cuts on top of those disclosed earlier this year, while acquiring computer services companies and expanding software development to lessen its reliance on hardware.
Outside technology, Barrick Gold (ABX: down $0.75 to $15.68, Research, Estimates) agreed to buy U.S. gold mining rival Homestake Mining (HM: up $1.40 to $8.05, Research, Estimates) in a $2.3 billion stock deal that will create the world's second-largest gold producer.
The nation's biggest savings and loan, Washington Mutual (WM: down $1.90 to $37.00, Research, Estimates), confirmed it is moving into the New York market with the $5.2 billion purchase of Dime Bancorp (DME: up $1.02 to $37.90, Research, Estimates).
The deal will be worth a premium of about 11 percent over Friday's close, when Dime stock lost $1.20 to $36.88 after it said it was in merger talks but declined to identify its suitor. Shares of Washington Mutual lost 49 cents to $38.90. Dime fought off an unsolicited bid by North Fork Bancorp last year. Walgreen (WAG: down $3.76 to $37.25, Research, Estimates), the nation's largest drugstore chain, is set to report its financial results, with forecasts for 22 cents a share, up from 19 cents a year earlier, according to First Call.
There were some signs that the labor turbulence hitting the nation's airlines may be calming down. Striking pilots at Comair Inc., the feeder airline unit of No. 3 carrier Delta Air Lines (DAL: down $1.71 to $41.83, Research, Estimates), voted to accept a tentative contract agreement and end their three-month strike late Friday afternoon. The subsidiary expects to resume limited service under its Delta Connection name July 2. And mechanics reached a tentative agreement Sunday with American Airlines, a unit of AMR Corp. (AMR: down $1.12 to $33.24, Research, Estimates), the world's largest airline holding company. But talks broke off late Friday between American and the union representing its flight attendants, although those talks are due to resume Thursday. The flight attendants could go on strike Sunday unless there is an agreement or intervention by President Bush. 
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