updated 1/21/2004 11:51:20 AM ET 2004-01-21T16:51:20

Blue-chip stocks pulled back Tuesday, retreating from multi-year highs set in Friday’s session, as investors took profits from an eight-week advance amid a series of strong profit reports from Dow 30 components like Citigroup, Johnson & Johnson and 3M.

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Analysts said Wall Street has already anticipated a strong fourth-quarter earnings season, which kicks into high gear this week with 110 firms in the Standard & Poor's 500-stock index and nine members of the Dow Jones industrial average reporting results. Investors are looking for upbeat forecasts before sending stock prices higher.

“We’re seeing a pure case of selling into the good news here,” said Peter Cardillo, chief strategist at Global Partners Securities. “Corporate guidance has been optimistic, and I think the market likes that, but stocks are already high, and I think we’re also seeing a little bit of investor caution ahead of the State of the Union address tonight.”

Michael Whitman, a trader at Stuyvesant Trading Group, told CNBC that despite Tuesday’s blue-chip sell-off, investors remain optimistic about the market’s outlook. "The Dow might be down, but the overall market is still high," he said.

“Stocks are rallying into the earnings reports, but not when the earnings hit. You’re getting great results, but with the market up for eight straight weeks they just aren’t good enough to beat the whisper numbers,” Whitman noted, referring to the unofficial earnings forecasts that circulate among professional investors.

The Dow Jones industrials finished Tuesday down 71.85 points, or 0.7 percent, at 10,528.66, having closed Friday’s session at 10,600.51 -- its highest level in almost two years. The U.S. markets were closed Monday to commemorate Martin Luther King Jr. Day.

Broader stock indices finished narrowly mixed.

The tech-rich Nasdaq Composite index was up 7.52 points, or 0.4 percent, at 2,147.98 by the close, finishing at a fresh 2-1/2 year high, while the S&P 500 index closed Tuesday 1.06 points lower, or off 0.09 percent at 1,138.77, down from Friday's two-year high.

Shares of Dow components Citigroup, 3M, General Motors and United Technologies all fell Tuesday, despite posting higher quarterly profits. Honeywell International was among the Dow index’s worst-performing stocks, down 4.7 percent to $35.66 after a deal that would have shielded the firm from asbestos liabilities of one of its units fell apart.

A handful of U.S. banks posted higher fourth-quarter profits, helped by consumer banking as the economy grew. Profit rose 10 percent at Wells Fargo, 16 percent at Bank One and 19 percent at U.S. Bancorp. Shares of the three banks ended narrowly mixed.

Johnson & Johnson was among the few stocks in the Dow showing modest gains, rising 2.1 percent to $51.50 after the healthcare firm reported a higher fourth-quarter profit, helped by sales of prescription drugs and a hot-selling new heart device.

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Losses in the technology sector were minimized by fiber-optic components maker JDS Uniphase and online stock trading firm Ameritrade Holding, which rose 10.8 percent to $5.73 and 12.3 percent to $17.26, respectively, amid rumors JDS may be an acquisition target and after Ameritrade said its quarterly profit trebled.

Stocks moved higher again last week, with the Dow and the broader S&P 500 index both recording their eighth straight weeks of gains. Stock prices have risen over 40 percent since hitting a multi-year low in March 2003 and many professional investors are expecting to see the market consolidate a little during the current earnings season.

"I don't expect to see huge gains as the quarterly reports come in, because we've already moved up so far," said Paul Cherney, chief real-time market analyst at S&P Marketscope.

"A lot of people figure the good earnings news has already been discounted," Cherney said. "So when companies come through with good or slightly better-than-expected news and deliver what's anticipated, there's no reason why prices should go higher."

Stock markets in Asia and Europe closed narrowly mixed.

The dollar’s week-long rally crumbled Tuesday, as the greenback dropped nearly 2 percent against the euro and the yen. The dollar was lately trading at 1.2577 dollars to the euro and 107.05 yen to the dollar, compared with 1.2373 dollars and 106.72 yen late Friday.

Reuters contributed to this story

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