Stocks Dive on Fed Fears; Dow Off 105

The first real wave of profit-taking hit the summer stock rally Tuesday, slicing more than 100 points off the Dow Jones industrials and preventing a 10th consecutive Nasdaq record.

Traders blamed comments by Federal Reserve Board Chairman Alan Greenspan, who suggested the central bank’s next move is more likely to be toward higher interest rates than lower.

The Dow sank 105.56 points, or 1.1%, to 9,190.19. An early 48-point gain had briefly put the blue-chip barometer above Friday’s closing record of 9,337.97.

The Nasdaq index, which has been streaking in recent weeks and as of Monday had notched nine consecutive record closes, slumped 35.11 points, or 1.7%, to 1,979.14.

The index had been flirting with record highs less than two hours before the closing bell, when a rash of selling hit.

In the broad market, declining issues outnumbered advancers by about a 2-1 margin on the New York Stock Exchange and on Nasdaq, in heavy trading.

Greenspan, on Capitol Hill, warned that the domestic economy is still threatened by inflationary pressures.

“People were kind of hoping he would be friendlier toward easing Fed [interest rate] policy and he was anything but that,” said Dan Ascani, president and research director at Global Market Strategists in Gainesville, Ga.

Greenspan also repeated his concern that investors’ high expectations for corporate earnings growth are unrealistic.

“History tells us that [forecast] is going to run into some difficulty sooner rather than later, which suggests that these three- to five-year projections of analysts are unrealistic and the real world will somehow converge, and suggest that to them in no uncertain terms,” Greenspan warned, implying the possibility of lower stock prices.

While the stock market appeared unnerved by the Fed chief’s comments, the bond market rallied. Many bond investors apparently chose to read into Greenspan’s comments the potential for stable interest rates at least in the near term.

The yield on the bellwether 30-year Treasury bond fell to 5.66% from 5.71% on Monday.

The dollar also rallied, rising to 140.40 yen, up 1.52 yen.

The stock market had other concerns Tuesday besides Greenspan. A disappointing earnings forecast from drug giant Merck weighed on blue chips.

What’s more, analysts say many big-name stocks are simply overbought after the rally of recent weeks and that a pullback here is overdue.

Among Tuesday’s highlights:

* Merck’s drop of $9.81 to $128.56 on its profit report dragged the rest of the drug group lower, including Pfizer, down $3.81 to $114.13, and Schering-Plough, down $3.19 to $99.75.

* Other weak blue chips included American Express, down $2.13 to $112.44; Boeing, down $1.06 to $48.19; and GE, off $2.56 to $92.94.

* Tech stocks leading Nasdaq lower included Dell, down $5.13 to $110.88; Microsoft, down $4.19 to $112.81; Sun Microsystems, down $2.38 to $49.50; and Cisco Systems, down $4.25 to $98.94.

But IBM soared $6.13 to $128.13 despite reporting flat profits on Monday.

* Some Internet stocks also fell, with Amazon.com down $5.44 to $132.06 and America Online off $6.56 to $129.56.

But others gained, including Excite, up $1.38 to $48.75, and Broadcast.com, up $3 to $63.50.

* Financial shares suffered despite some better-than-expected profit reports from Chase Manhattan and merger partners Citicorp and Travelers Group. Chase fell 3 1/2 to 71 1/2, Citicorp fell 8 7/8 to 172, and Travelers fell 3 5/8 to 69 as the Dow’s second-weakest issue. Wells Fargo fell 9 3/8 to 370 5/8.

Market Roundup, D9