MARKET SNAPSHOT: U.S. Stocks Suffer Worst Drop In More Than Two Months

By Barbara Kollmeyer, MarketWatch

NEW YORK (MarketWatch) -- The U.S. stock investors turned skittish on Tuesday driving major averages to their lowest levels in months. A jarring trading day follows a serious of tough weeks in stocks marked by precipitous declines, which have left the S&P 500 sitting 3.8% lower from its peak reached just three weeks ago on Sept. 18.

The Dow Jones Industrial Average had the worst selling day in more than two months, settling at the lowest levels since mid-August.

Investors flocked into the safety of U.S. Treasurys, pushing the yield down to 2.34%. Nervousness among investors was most evident in the Wall Street's "fear gauge" - CBOE Vix index rose 12% to 17.39, the level last seen in March.

The S&P 500 (SPX) closed 29.72 points, or 1.5%, at 1,935.1. The Dow Jones Industrial Average (DJI) dropped 272.5 points, or 1.6%, to 16,719.33. The Nasdaq Composite (RIXF) fell 69.60 points, or 1.6%, to 4,385.20. The Russell 2000 dropped 17.17 points, or 1.4%, to 1,077.44.

Among worst hit sectors were retailers and transportation companies. The SPDR S&P Retail ETF fell 1.8%, while the Dow Jones Transportation Average fell 2.5%. Read: U.S. stocks test key technical levels

Despite the recent, unsettling weakness, some strategists are optimistic about upcoming results from third-quarter earnings.

Burt White, chief investment officer at LPL Financial, and Jeffrey Buchbinder, market strategist at the same company, said in a note Tuesday they expect "another good earnings season" that is likely to boost stocks.

They listed several reasons for optimism in the current reporting season: U.S. economic growth has picked up; upside earnings surprises have been typical since summer 2009; the Institute for Supply Management manufacturing Index, which has a strong track record of predicting earnings growth six months out, has shown solid growth in the past six months; and there have been few signs of cost pressures. Also 'Sell Rosh Hashanah, buy Yom Kippur' worked this year.

Braced for earnings: Yum! Brands Inc. (YUM) missed consensus estimates on earnings and revenues. Shares fell 1% in after-hours trade, after closing 2.3% lower.

SodaStream International Inc. (SODA)shares sank 22% in heavy volume ahead of the bell, hit hard as the carbonated-drinks equipment maker warned of a quarterly-sales shortfall.

The Container Store Inc. (TCS) shares fell 25%, extending their slide late Monday after the storage-organization retailer cut its profit and sales view.

Women's clothing retailer Christopher & Banks Corp. (CBK) forecast quarterly sales below Wall Street's estimate, sending shares down 26%.

Agco Corp. (AGCO) shares stumbled 11% as the agricultural-equipment company cut its profit outlook for the year because of weaker-than-expected demand.

Other markets: European markets closed sharply lower after another round of downbeat German data. Asian stocks had a mixed session, with the Nikkei 225 index down 0.7%, but Hong Kong's Hang Seng index rose 0.5%. Gold prices (GCZ4) edged just above the key $1,200-an-ounce level. Oil futures (CLX4) slipped, trading below $90 a barrel.

Subscribe to WSJ: http://online.wsj.com?mod=djnwires