Stocks extend week's losses after 2-month rally

On Wall Street, not so bad is no longer good enough.

Stocks extended the week's losses Friday, further chilling the market's spring rally. Traders who last week sent stocks higher on economic news that wasn't as bad as expected are now selling. And analysts say it will take more upbeat data to restart the rally that swept major stock indicators up more than 30% from 12-year lows in early March.

The Labor Department said Friday that consumer prices in April were flat, as economists predicted. Manufacturing activity in the New York area and industrial production contracted less than economists expected. And a Reuters/University of Michigan index of consumer sentiment rose to an eight-month high in May, a possible harbinger of improved consumer spending.

But even with this handful of silver-lining economic data, traders found little incentive to buy. Instead, a drop in the price of oil hit energy companies, while financial stocks slid on worries that the economic recovery could be further off than traders had been betting in recent months.

"This market is tired," said Joe Saluzzi, co-head of equity trading at Themis Trading.

Wall Street's rally has also hit a lull now that the government's stress tests of banks are done, earnings reports are winding down and the first wave of April economic data has been released. Traders aren't clear what the next catalyst might be to pump the market higher — or whether the gains might erode.

"We've gotten through the panic point, and what will get us to the next level is seeing the economy actually grow. It'll happen, but it's a matter of when," said Douglas Kreps, managing director at Fort Pitt Capital Group.

The Dow Jones industrial average fell 62.68, or 0.8%, to 8,268.64. The broader Standard & Poor's 500 index fell 10.19, or 1.1%, to 882.88, and the Nasdaq composite index fell 9.07, or 0.5%, to 1,680.14.

For the week, the Dow fell 3.6%, the S&P 500 index lost 5% and the Nasdaq slid 3.4%.

With the S&P 500 index up 30.5% from the lows of two months ago, many traders are finding it a safer bet to cash in some of their gains. About two stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to 5.3 billion shares, compared with 6.8 billion shares traded Thursday.

Not all the news of the day fit with the idea that the economy is sewing up its holes.

The Treasury Department agreed to extend billions in federal bailout funds to six major life insurers. The move was positive because it means the insurers will get more capital, but negative because it implied that the insurers' problems posed a serious risk to the financial system.

Among the companies, the Hartford Financial Services Group said it is eligible for $3.4 billion from the Troubled Asset Relief Program, or TARP, while Lincoln National said it has been initially approved for a $2.5 billion injection.

Hartford fell 15 cents to $14.60, while Lincoln National fell 12 cents to $16.12.

Investors also remained concerned about the auto industry. General Motors , as expected, began notifying 1,100 U.S. dealers Friday that their franchise agreements would not be renewed. GM said the closures — which come a day after Chrysler cut ties with a quarter of its dealers — must be made as part of its government-ordered restructuring plan. GM fell 6 cents, or 5.2%, to $1.09.

Energy stocks weighed on the market as oil slid $2.28 to settle at $56.34 a barrel on the New York Mercantile Exchange. Schlumberger fell $1.88, or 3.5%, to $52.05, while Devon Energy fell $3.51, or 5.7%, to $58.50.

FirstEnergy fell $3.87, or 9.6%, to $36.47 after the regional electric utility's energy supply and pricing auction in Ohio came in below analyst expectations. The stock traded as low as $35.26, a level not seen since December 2003.

The market hit its highest levels of the rally last Friday as investors bought when news, including April employment figures, wasn't as grim as feared. This week, however, the government surprised Wall Street with its report that retail sales fell in April.

Dreyfus Chief Investment Officer Phil Maisano contends the break makes sense. He said the market is fairly valued where it stands and is now factoring in a severe recession instead of a depression.

"We're clearly not going to have any form of a V-shaped recovery," Maisano said, referring to the pace of the rebound from the economy's tumble in the fall. "It will be a longer slog."

Even with the government's bank rescue and economic stimulus spending, Maisano expects the economy will still have a tough recovery.

"It was virtually a tourniquet. It stopped the bleeding but it doesn't have much effect on the healing at the moment," he said.

Next week, investors will get data on housing sales on Monday, on housing construction a day later and on regional manufacturing on Thursday. The reports could help drive the market but many analysts say more clear signs of an economic recovery, not just stabilizing, will be what is needed to propel Wall Street.

In other trading Friday, the Russell 2000 index of smaller companies fell 4.87, or 1%, to 475.84.

Bond prices fell after the inflation data. The yield on the 10-year Treasury note rose to 3.14% from 3.09% late Thursday.

The dollar rose against most other major currencies, while gold prices rose.

Overseas, Britain's FTSE 100 fell 0.3%, Germany's DAX index slipped less than 0.1%, and France's CAC-40 rose 0.4%. Japan's Nikkei stock average rose 1.9%.