Dimming optimism weighs on stocks

NEW YORK -- The super-size spring stock rally that was built on hope is morphing into a summer swoon as investors grapple with the reality of a sluggish economic rebound.

Signs of stocks' fading momentum are piling up in unfriendly market statistics that show just how uncomfortable investors are with the current pace of the recovery:

•After plunging 161 points on Tuesday to 8164, the Dow Jones industrial average is trading at a 10-week low, down 7% in 2009.

•The Dow has fallen three weeks in a row and is on course for a fourth weekly decline.

•The blue-chip average has plunged 635 points since its June 12 recovery high, and is now 7.2% below that level, inching closer to a "correction," or a drop of 10% or more from a high.

Momentum buying that pushed the Dow up more than 34% from its March 9 bear market low has been replaced by a protect-my-profits mentality.

"We've certainly seen a loss of momentum," says Bruce Bittles, chief strategist at RW Baird.

The so-called recovery trade — an optimistic bet on better days ahead for workers and businesses — has been taken off the table, at least for now. In its place is a more cautious trade, marked by renewed uncertainty about the timing of an economic recovery and a resumption of the debate as to how far stocks can fall.

Stoking the latest angst was growing talk out of Washington about the possible need for a second stimulus package, which suggests the current stimulus is not working fast enough to stem the massive job losses or jolt the economy out of its doldrums.

That grim reminder of how the recession is reaping havoc on the American dream follows last week's government report showing bigger-than-expected job losses in June, as well as an unexpected dip in June consumer confidence. Consumers are the key engine of economic growth, accounting for 70% of activity.

"What stalled the rally was the realization that unemployment is still going up," says Denis Amato, chief investment officer at Ancora Advisors. Investors are grappling with a no-win situation as it relates to the government's rescue plan, says Amato. If it gets the economy humming again, higher interest rates and inflation are likely to follow. If it fails, profits won't support higher prices.