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US STOCKS-Wall St slips on China inflation worries, VIX soars

Published 11/12/2010, 02:37 PM
Updated 11/12/2010, 02:40 PM
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* Commodity-related shares fall on China tightening fears

* CBOE Volatility Index leaps 11 pct

* Dow off 1 pct, S&P down 1.3 pct, Nasdaq off 1.5 pct (Updates to mid-afternoon, changes byline)

By Angela Moon

NEW YORK, Nov 12 (Reuters) - U.S. stocks fell on Friday as inflation worries in China prompted investors to book profits and reassess whether to keep their bullish positions.

Reflecting the concerns, the CBOE Volatility Index jumped 10.8 percent to 20.66, the first time for the index to rise above 20 in over a week. The CBOE Nasdaq 100 Volatility Index also surged 16.4 percent to 22.55.

"The debt problems in Ireland and Greece, in addition to the inflation worries in China, are giving investors many reasons to take a look at the profits they may have enjoyed over the past few weeks and reassess as to whether they should keep the positions or at least buy protective options so they can define their risk," said TD Ameritrade chief derivatives strategist Joe Kinahan.

"Whenever you see volatility indexes rising like this, that indicates that people are searching for protection in the options market either in the indexes, exchange-traded funds or individual equities."

Expectations of an interest-rate hike in China hit commodity prices, weighing on energy and natural resource stocks.

Commodity prices fell broadly, with crude oil futures down 3.5 percent and copper off nearly 3 percent. That weighed on cyclical stocks, with aluminum producer Alcoa Inc, the Dow's second-largest percentage loser, slumping 2.5 percent to $13.47.

Among the Dow's other major decliners, Exxon Mobil Corp was off 1.7 percent at $70.59, while heavy machinery maker Caterpillar Inc was down 2.4 percent at $80.44. The S&P energy index slid 1.9 percent, while the S&P materials index lost 2.5 percent.

The Dow Jones industrial average dropped 106.83 points, or 0.95 percent, to 11,176.27. The Standard & Poor's 500 Index fell 16.13 points, or 1.33 percent, to 1,197.41. The Nasdaq Composite Index slid 37.25 points, or 1.46 percent, to 2,518.27.

The Shanghai Composite Index tumbled 5.16 percent, notching its biggest percentage loss in over a year on the likelihood China's central bank was set to raise rates to tackle inflation, a move that could pressure future growth.

"The whole commodity complex is exceptionally weak after the overnight action in China, and we need to see how it all plays out," said Tom Samuels, managing partner at Palantir Capital Management in Houston. "This may be the first seed of doubt about the healing power of (quantitative easing)."

The S&P 500 neared the 61.8 percent retracement of its slide from the historic highs in 2007 to the lows in March 2009 -- then backed away from that level.

This is the second time the index shied away from the 1,228 area, and its chart could be drawing a bearish "double top" formation. After the last retreat from that level in April, the S&P 500 started a correction that took it down to its July lows.

Boeing Co was the Dow's top percentage loser, shedding 3.2 percent to $63.30 after Sanford C. Bernstein cut its rating on the stock to "market perform," citing more potential delays for its 787 Dreamliner.

Stocks have stalled in recent sessions after a two-month rally that climaxed last week, when the Dow and Nasdaq hit levels not seen since the collapse of Lehman Brothers in September 2008.

Worries that Ireland may default on its debt as well as declines in commodity prices and an unexpectedly weak outlook from Cisco Systems Inc helped cloud the market's outlook, though some investors said the underlying trend is strong.

D.R. Horton Inc fell 5.6 percent to $11.49 after the biggest U.S. home builder said orders fell, even as it reported a narrower quarterly loss.

On the upside, Intel Corp rose 1.6 percent to $21.55 after the chipmaker boosted its dividend. (Additional reporting by Doris Frankel and Ryan Vlastelica; Editing by Jan Paschal)

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