Stocks drop a second day as Internet, biotech shares slump

NEW YORK – U.S. stocks fell a second day from record levels, with the Nasdaq Composite Index tumbling the most since April, as investors sold Internet and biotechnology shares before the start of earnings season.

Twitter Inc. and Pandora Media Inc. sank at least 7.2 percent to pace a Dow Jones gauge of Internet shares to the biggest drop since April. The Nasdaq Biotechnology Index headed for its steepest two-day slide in two months. Delta Air Lines Inc. and Southwest Airlines Co. fell at least 3.7 percent as carriers slumped. Alcoa Inc. was little changed before it reports results Tuesday afternoon.

The Standard & Poor’s 500 Index lost 0.9 percent to 1,960.23 at 12:15 p.m. in New York. The Dow Jones Industrial Average fell 140.93 points, or 0.8 percent, to 16,883.28. The Russell 2000 Index sank 1.6 percent, while the Nasdaq Composite slid 1.7 percent, the most since April. Trading in S&P 500 stocks was 22 percent above the 30-day average at this time of day.

“Many investors wonder if the ride is over,” Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc., said in a report on Tuesday. “As stock indices hit new highs, there are those that fear further gains, given defensive positioning, but more worry about buying in now just in time for a severe pullback.”

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The Chicago Board Options Exchange Volatility Index, the measure known as VIX that tracks investors’ volatility expectations for the S&P 500, jumped 9.8 percent on Monday from a seven-year low. The index added 9.4 percent to 12.39 on Tuesday, giving it the biggest two-day rally since April 11.

Equity records

Both the S&P 500 and the Dow retreated from records on Monday amid speculation the Federal Reserve will raise interest rates sooner than expected.

The Russell 2000 tumbled 1.8 percent, the most since April 25. The index last week recovered nearly all its losses from a two-month selloff of Internet and small-cap shares, coming within a point of an all-time high. Gauges of Internet and biotechnology companies also had climbed back from their lows for the year, retracing more than half of their earlier losses.

Investors resumed selling those industries this week after a rally drove valuations to about double that of the S&P 500. The Nasdaq Composite is trading at 35 times reported earnings, compared with a multiple of 18 for the equities benchmark.

The Dow Jones Internet Composite Index sank 3.4 percent on Tuesday, the most since April 28. The gauge had rallied 15 percent from a low on May 8 to erase its losses for the year before falling 4.8 percent in the past two days. The barometer surged 54 percent in 2013.

Twitter sank 7.2 percent to $37.32, while Pandora dropped 8.7 percent to $25.40 to pace declines. Both stocks headed for the lowest close since May 6.

Bigger declines

The Nasdaq Biotechnology index has fallen 4.8 percent in the past two days, the most since April 11. It had surged 23 percent since a low that month.

“There’s clearly some profit-taking in names that have done extremely well,” Peter Tuz, who helps manage more than $450 million as president of Chase Investment Counsel Corp. in Charlottesville, Va., said in a phone interview. “Some of the stocks have pretty lofty P/E ratios, so if anything does go awry with earnings or guidance, they could have bigger declines. It’s just a little bit of rebalancing, which isn’t atypical for the start of a new quarter.”

Eight of the 10 main S&P 500 groups retreated Tuesday, with technology and health-care shares sliding at least 1 percent. Utilities and producers of consumer staples advanced, as investors shifted out of the fastest-growing industries and sought safety in firms with stable earnings and dividends.

Fed minutes

The Fed will release minutes from its June meeting on Wednesday. Policy makers trimmed bond purchases last month by $10 billion for the fifth consecutive time, saying economic growth is rebounding and the job market is improving.

Officials are debating the timing for the first increase in the main interest rate since 2006. Policy makers have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008.

Goldman Sachs Group Inc. on Monday joined banks including JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in bringing forward it estimates for Fed rate increases after data last week showed the economy added more workers than estimated in June.

In Europe, signs the economic recovery is losing momentum sent stocks lower for a third day. U.K. manufacturing unexpectedly slumped the most in 16 months in May and German exports contracted more than estimated, data showed Tuesday.

Earnings estimates

Alcoa, the largest American aluminum producer, will report second-quarter earnings after the close of trading on Tuesday, unofficially kicking off the season. Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs, Yahoo! Inc. and Johnson & Johnson are among companies reporting financial results in the next week.

Profit for S&P 500 members probably climbed 5 percent in the three months through June, while sales rose 3 percent, according to analyst estimates compiled by Bloomberg. Three rounds of monetary stimulus from the Fed and better-than- forecast corporate earnings have driven the S&P 500 up more than 190 percent from a low reached in March 2009.

The U.S. equity index is trading at 16.7 times the projected earnings of its members, near its highest valuation since the end of 2009 and higher than the five-year average of 14.3.

“Equities are near all-time highs and the air will only get thinner,” said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG in Bonn, Germany. “We need a strong results season now to support equities because investors will keep wondering when the Fed will hike rates and this can bring some nervousness to the market.”

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