NEW YORK (CNNfn) - U.S. equity indexes on Wednesday backed off a two-day rally, as chip-led tech selling exacerbated stock investor fears of economic recession and military retaliation in response to this month's terrorist attacks.
"Emotions are running high. People are nervous. They're moving to the sidelines," Ted Weisberg, trader, Seaport Securities, told CNNfn's Street Sweep.
The decline undermined two days of gains, which had followed last week's massive selloffs. However analysts said the pullback was not unexpected or overly nervous, considering the circumstances.
"The rally was largely technical, so it's not surprising that there was some selling today," Weisberg said.
The Nasdaq composite closed down 37.60 to 1,464.04, while the Dow Jones industrial average fell 92.58 to 8,567.39, well above its lows for the day. The S&P 500 was down 5.23 at 1,007.04.
Intel was pressured by a brokerage's lowered earnings estimates. The No. 1 chipmaker in turn contributed to the decline of a number of other tech issues. Global power company AES was hit hard after issuing a warning.
"A lot of people made a lot of money in the last two days, but nothing much has changed. We're still facing layoffs and the threat of action in Afghanistan," said Peter Green, market analyst at Gerard Klauer Mattison & Co. "This is still a market that is focused on good corporate events going forward, and right now, we're not really seeing any."
Green also said he was disappointed by the fact that the Nasdaq composite index was barely higher Tuesday, saying the Nasdaq will need to take the lead in order for any rally to be sustainable.
However, stepping back from the day's losses, analysts found some comfort in historic trends supporting a bounce following periods of recession, saying that some of the sectors hit hardest today, such as semiconductors and energy, are oversold and should be the first to recover.
"Clearly, we will see stabilization. It's just a matter of when," Art Hogan, chief market analyst at Jefferies & Co., told CNNfn's The Money Gang.
Market breadth was negative. On the Nasdaq, decliners topped advancers by a 7-to-4 margin as 1.73 billion shares changed hands. On the New York Stock Exchange, declines edged advancers by an 8-to-7 edge as 1.51 billion shares changed hands.
Asian markets closed mixed Wednesday, with Tokyo lower and Hong Kong advancing. European markets finished higher. Treasury prices, which often move inversely to stocks, were higher. The dollar was virtually unchanged against the euro and was modestly higher against the yen.
Intel paces chip decline
Goldman Sachs dealt another blow to chipmakers, one of the few defiantly negative sectors in the otherwise upward trend of the past couple of days. Analyst Terry Ragsdale cut Intel's (INTC: down $0.78 to $20.90, Research, Estimates) 2002 earnings estimate to 42 cents a share from 60 cents a share, saying the recovery in personal computer demand is going to be delayed.
Xilinx (XLNX: down $3.25 to $21.64, Research, Estimates), RF Micro Devices (RFMD: down $3.52 to $16.29, Research, Estimates), PMC-Sierra (PMCS: down $1.81 to $11.72, Research, Estimates), and KLA-Tencor (KLAC: down $3.02 to $32.68, Research, Estimates) all took the news hard.
Computer chipmaker Micron Technology (MU: down $3.99 to $17.25, Research, Estimates) had its own problems, as the company reported a wider-than-expected fiscal fourth-quarter loss Tuesday on sales that fell from a year earlier.
Advanced networking system maker Redback Networks (RBAK: down $0.50 to $1.84, Research, Estimates) guided lower for its third quarter.
Extreme Networks (EXTR: down $1.65 to $7.33, Research, Estimates) fell after ABN Amro cut its fiscal 2002 earnings estimates on the Internet infrastructure company.
Global power company AES (AES: down $12.00 to $12.25, Research, Estimates) was the New York Stock Exchange's most heavily traded issue, after the company cut its annual profit forecast, pressuring rivals Duke Energy (DUK: down $1.03 to $36.57, Research, Estimates) and Dominion (D: down $0.61 to $56.80, Research, Estimates).
Goldman Sachs analyst Laura Conigliaro reduced estimates on computer hardware makers IBM (IBM: down $3.15 to $91.30, Research, Estimates), Sun Microsystems (SUNW: down $0.25 to $8.44, Research, Estimates), and EMC (EMC: down $0.28 to $12.72, Research, Estimates) in a before-hours note.
Competitors Compaq Computer (CPQ: down $0.42 to $8.40, Research, Estimates) and Dell Computer (DELL: down $1.00 to $18.16, Research, Estimates) fell in tandem.
In addition to IBM, Caterpillar (CAT: down $2.31 to $44.07, Research, Estimates) pulled the Dow down after UBS Warburg downgraded the industrial equipment maker. Honeywell (HON: down $2.25 to $26.00, Research, Estimates) and United Technologies (UTX: down $2.15 to $44.65, Research, Estimates) also weakened the Dow.
Bed, Bath & Beyond (BBBY: up $2.13 to $25.09, Research, Estimates) said Tuesday that comparatively strong sales in the second quarter boosted its profit by 24 percent from a year earlier, matching estimates.
No. 1 retailer Wal-Mart Stores (WMT: up $1.08 to $49.48, Research, Estimates) rose on a J.P. Morgan upgrade. But J.P. Morgan downgraded May Department Stores (MAY: down $1.77 to $28.03, Research, Estimates).
Analysts continued to dispute the long-term impact of this week's resignation of Charter Communications (CHTR: down $0.21 to $12.01, Research, Estimates) CEO Jerry Kent, with UBS Warburg upgrading the company and Lehman Bros. issuing a downgrade, although investors had no such qualms.
Helicopter maker Textron (TXT: down $10.20 to $32.80, Research, Estimates) warned its third- and fourth-quarter results won't meet expectations and that it will cut 2,500 jobs.
Deutsche Bank Alex. Brown upgraded cruise line Carnival (CCL: up $1.18 to $21.91, Research, Estimates), which lifted rival Royal Caribbean Cruises (RCL: up $0.58 to $10.18, Research, Estimates).
Another bright spot was pre-press systems company Autologic Information International (AIII: up $3.75 to $7.00, Research, Estimates), which rose on news that it had accepted a $42.5 million buyout offer from Belgian image technology group Agfa Gevaert. 
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