Nasdaq plunges 7% in tech sell-off

It closes below 4,000 for first time since

Jan.

Dow drops 1.4%

Microsoft sets off decline

April 13, 2000|By William Patalon III | William Patalon III,SUN STAFF

The Nasdaq composite index plunged more than 7 percent yesterday, closing below the 4,000 level for the first time since January and leaving it 25 percent below the record high set just four weeks ago.

The technology-focused Nasdaq lost 286.27 points -- its second-biggest point drop -- to stand yesterday at 3,769.63. The technology sell-off also spread to the Dow Jones industrial average, which fell 161.95 points, or 1.4 percent, to close at 11,125.13. However, all but three points of the Dow's drop was due to technology stocks that trade as part of that 30-stock index: Hewlett-Packard, Intel Corp., IBM Corp. and Microsoft Corp.

Earlier in the day, the Dow had been up as much as 138 points, and the loss ended a two-day winning streak.

"We are at a critical time, and it's up in the air which way the market will turn," said David Straus, senior portfolio manager for Johnston, Lemon Asset Management in Washington. Investors are finding that "a momentum market works both ways" -- up and down.

Barry Hyman, a market strategist at Ehrenkrantz, King, Nussbaum in New York, said: "It could get worse before it gets better because we are seeing liquidation on the large-cap tech front, which is something we have not seen before. The only glimmer of hope for the Nasdaq was the ability of the large-caps to go higher."

Trading in technology stocks has been frenetic the past several years as investors, excited by the prospects of the Internet, bid up shares of companies competing in that arena. But even as analysts warned that these stocks were becoming vastly overpriced, investors traded them ever higher. In fact, by the time the recent sell-off began a few weeks ago, investors had become less and less concerned about such things as sales or earnings, lusting instead to buy stocks that were rising fast -- the momentum market to which Straus referred.

But the backlash has come, and investors are looking at these technology firms with a jaundiced eye, analysts say.

Market experts said yesterday's drop was touched off by a noted Microsoft Corp. analyst who lowered his third-quarter revenue estimate on the embattled software giant. The analyst, Richard Sherlund of Goldman Sachs & Co., cut his sales projection from $5.95 billion to $5.75 billion, stating that personal computer sales were slower than originally believed.

Microsoft shares fell more than $4 during the day's trading, and the gloom about that market leader spread to other technology stocks.

"Folks are saying `Wait a minute -- if Microsoft isn't going to be able to exceed expectations, we'll stay on the sidelines'" and steer clear of technology stocks, said Michael Manns, a senior portfolio manager for American Express Financial Advisors in Minneapolis, which owns Microsoft shares.

At the very least, analysts said, the volatility has brought some welcome skepticism to the technology market, ending the frenzy for any stock tied to the Internet.

"Investors will be more discriminating in their buying of technology and Internet stocks," said Alfred E. Goldman, chief market strategist at A. G. Edwards & Sons in St. Louis.

Financial stocks benefited somewhat from the sell-off, creeping higher after J. P. Morgan reported first-quarter earnings that beat estimates. Bank stocks such as First Union Corp. and Capital One Financial Corp. also rose on the day.

"The momentum has shifted, at least temporarily, toward financials," said Bill Rubin, a portfolio manager at Keefe Managers Inc., which specializes in financial stocks. "The stocks had been knocked down too far relative to [their] very good earnings growth."

What happens next is anybody's guess, said Johnston, Lemon's Straus. The Nasdaq is near a major "support level" of 3,730 that it has already tested three times this year -- only to rebound and run higher.

Some market forecasters, or technical analysts, believe support levels are one way of forecasting the intentions of a stock or market index. A support level is a price that an index, or an individual stock, doesn't seem to want to go below, because there's more demand than supply at that price.

The Nasdaq might again test the 3,730 level -- or even temporarily fall beneath it, as it did in early January, late January and last week, Straus said. But as long as it doesn't close below that level, the index should hold steady for awhile, or perhaps even rally.

But once that support level gets pierced, a free fall could be in store. If that happens, Straus said, the Nasdaq could drop below 3,000.

Investor psychology is such that they always seem to bid a stock too high on good news, or punish it unnecessarily on bad news, he said.

High-tech companies "are still the companies with the greatest growth potential," Straus said. "But people tend to get a bit too anxious about them. They get over-exuberant on the way up and too depressed on the way down. But you wouldn't get such big swings if the companies weren't so exciting to begin with."

Wire services contributed to this article.

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