September Starts With 2% Slide for Stocks

Improved manufacturing growth and increased pending home sales weren't enough to halt a broad selloff that sent stocks down sharply as traders backed off from equities.

The Dow Jones Industrial Average closed down 186 to 9311, a 2% one-day drop. The Nasdaq shed 40 to 1969, also a 2% slide, and the S&P 500 declined 23 to 998, a 2.3% loss. The second consecutive down open may signal a reversal of the summer rally, which was powered by a slew of better than expected earnings results, many derived from significant corporate cost cutting.

Traders were buoyed by the Institute for Supply Manufacturing's August manufacturing report, which showed a rise to 52.9, the first time it registered above 50 since January of 2008. The National Association of Realtors said pending home sales, transactions for which contracts have been signed, rose 3.2% in July, the biggest increase since June 2007. However, the $8,000 federal tax credit extended to first-time home buyers will expire in November, and that will likely slow those increases.

The Commerce Department said July construction spending dropped 0.2% from June.

The Dow ended August up 3.5%, its fifth monthly gain in six months and the best August since 2000. It remains less than 100 points below its high for the year after hitting a low of 6547 on March 9. The S&P 500 ended August up 3.4%, its sixth consecutive monthly gain.

Many on Wall Street think stocks are due for a correction, typically defined as a 10% decline from a high. September's history also could lead traders to take some profits after the huge spring and summer gains, but Tuesday's data could sustain buying trends. Since 1900, the Dow has fallen 1.1% on average in September, the only month with a significant average drop, according to Ned Davis Research.

Stocks declined in Europe Tuesday after data showed joblessness in the euro-zone at a 10-year high. Also, data in the U.K. showed the manufacturing sector unexpectedly sliding back into contraction and a decline in consumer lending for the first time in at least 16 years.

Shares of eBay (EBAY) rose on expectations it will announce a deal Tuesday to sell its Skype Internet telephony unit to a group of private investors, according to a report in the New York Times. The newspaper said a price wasn't disclosed, but eBay has said it wants around $2 billion for Skype, which is set to make more than $600 million in revenue this year.

Oil futures slumped despite stronger economic data. As of 3:59 p.m., futures traded on the Nymex had risen 15 cents to $68.20 a barrel, following the regular session close.