Investors lock in profits in stock market sell-off

NEW YORK -- The big recovery rally that drove stocks up more than 20% in a three-week span stalled for a second-consecutive session Monday as investors reacted to more troubles in the auto and banking sectors.

Investors locked in profits from the recent run-up after digesting news that the government had rejected plans from General Motors and Chrysler to fix their ailing businesses, a move that could send the struggling automakers to bankruptcy court. Comments from Treasury Secretary Timothy Geithner over the weekend suggesting that large U.S. banks are still in need of big cash infusions also tempered investors' budding optimism.

"It was a wake-up call to investors that all is not rosy," says Andy Brooks, trader at T. Rowe Price. "(The sell-off) tells us that while we might be working through problems in the economy, it will take time and won't be without bumps in the road."

U.S. stock indexes suffered declines of about 3% or more. The Dow Jones industrial average fell 254 points, or 3.3%, to 7522. The blue-chip gauge is down 14.3% in 2009 but up 6.5% in March.

"The market is now in a tug of war between growing confidence in government policy (to revive the economy) and growing despondency over the (short-term) economic backdrop," says Robert Barbera, chief economist at ITG. Investors had driven stocks up in prior weeks on the belief the economy is going to look better soon, he says, but that was "much too premature."

Given the sheer magnitude of the Dow's 21% rally from its March 9 bear market low to Thursday, many stock traders and investors downplayed the sell-off. Some traders blamed profit taking as the end of the first quarter nears today. Some said the market was due for a pullback after its best 14-day rally in more than 70 years. Others called the drop healthy, saying it was a pause to refresh.

Indeed, despite fears that the market's two-day swoon could signal that the recent rally is in danger of failing like prior head fakes in the current bear market — including the Dow's 19.6% rise off of its Nov. 20, 2008, low that fizzled and led to fresh lows — most analysts said it is premature to say the stock market is in danger of rolling over. "The market was ready to go down, but that doesn't mean it has to go back down to its lows of three weeks ago," says Bruce Bittles, market strategist at R.W. Baird.