Stocks Drop for Third Day in a Row as Investors Turn Cautious

For the third day in a row, major stock indices dropped.  The Dow was off by 0.1 percent to 10,318.  The S&P 500 dropped by 0.3 percent to 1,091.  And the Nasdaq declined by 0.5 percent to 2,146.

For the week, the Dow was up by 0.5 percent.  The S&P 500 broke a two week winning streak, dropping by 0.2 percent.  And the Nasdaq dropped by one percent on the week.

Concerns that the European Central Bank would phase out stimulus measures helped push international equities lower, and those concerns weighed on U.S. equities.  In addition, disappointing earnings at Dell and D.R. Horton pushed down stocks in the technology and housing sectors.

Offsetting those losses were stocks of drug companies like Merck and Pfizer and consumer staples like J.M. Smucker.  Those companies helped keep the Dow from dropping into the red for the week.

Volume was extremely light, with Friday's trading session seeing the year's fourth lowest number of shares exchanging hands.  This is a big surprise, as Friday was the options expiration date for the month of November.  Options expiration generally drives some trading, but even with that boost volume was very low.

European Central Bank president Jean Claude Trichet signaled that he would start to remove liquidity in order to prevent inflation.  "Not all our liquidity measures will be needed to the same extent as in the past.  Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally."

Much of Europe has returned to growth, albeit slow growth.  Thus, the concerns there are shifting from ensuring that the economy grows to fighting inflation.  A withdrawal of stimulus measures would likely slow growth further and multinationals would be affected by a slower growth rate in Europe.

Traders could also be concerned that stocks have come a long way and have run too far.  Analysts said that investors could be taking some of their gains and putting those funds into safer places.  That possibly could be fueled by some investor's concerns that the market is getting close to a top.  The big sign that we are approaching a top, some analysts say, would be big purchased by large institutional investors during the last half hour of the trading that.  That speculative buying by large investors often indicates a market top.

Caution is always appropriate when trading, but it's something that's even more needed now.  If stocks truly have come too far and a pullback is coming, investors need to take measures to lock in gains.  Then, if they believe the rally will continue, they can buy on the dips.