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Mixed data on production, housing weighs on stocks

MORE signs of a weak economy gave investors a reason to sell stocks for a second day.

Stocks extended their pullback yesterday after news of a seventh straight monthly drop in industrial production overshadowed better-than-expected reports on home construction, building permits and inflation.

The Dow Jones industrial average lost 107 points, bringing their two-day drop to nearly 300 points. Investors are nervous that a three-month surge in stocks, based on optimism about a recovering economy, might have been premature.

But analysts weren't surprised that investors were having second thoughts.

"It's unreasonable to think that the market is going to go straight up and never turn back," said Eric Ross, director of research at Canaccord Adams.

Analysts say investors need more clear evidence of growth to restart the market's rally, which has stalled as investors grow worried that a weaker dollar, higher commodities prices and rising interest rates will hamper the economy's recovery. The Standard & Poor's 500 index is still up 34.8 percent from the 12-year lows it hit in March.

"You've got to continue to have a constant flow of good news to push things higher," said Randy Frederick, director of trading at Charles Schwab. "And we just don't have that."

The Dow Jones industrial average fell 107.46, or 1.3 percent, to 8,504.67. The Standard & Poor's 500 index fell 11.75, or 1.3 percent, to 911.97, while the Nasdaq composite index fell 20.20, or 1.1 percent, to 1,796.18.

On Monday, the Dow tumbled 187 points, or 2.1 percent, putting it back into the red for 2009. Last week, the Dow was up on the year for the first time since January.

Analysts contend a pause in the rally is necessary for stocks to move higher. Market watchers tend to be alarmed when the market moves up in an unbroken line, saying it suggests indiscriminate buying that could easily dissipate once the market's mood changes.

"The market is very overbought right now and what it needs to do is consolidate and it needs to have a series of days like this," said Jon Merriman, chief executive of Merriman Curhan Ford.

Stocks rose in the early going after the Commerce Department said home construction jumped in May by the largest amount in three months after hitting a record low in April. Applications for building permits, which are seen as a good indicator of future activity, rose by 4 percent.

The Labor Department said wholesale prices rose less than expected in May as a big jump in the price of gasoline offset a drop in food costs.

But investors grew cautious after the Federal Reserve said industrial production fell a larger-than-expected 1.1 percent in May as the recession hurt demand for manufactured goods including cars, machinery and household appliances.

About two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.2 billion shares, up from 810.9 million a day earlier.

The Russell 2000 index of smaller companies fell 8.09, or 1.6 percent, to 503.74.


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