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Tue, Apr 17, 2001 EDT
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For Real March Madness, Watch the Market
By Eileen Glanton   Associated Press
NEW YORK — Forget about college basketball. The real March Madness broke out this past week in the stock market.

Technology stocks, which had shot up to stratospheric levels in recent months, were trampled. Blue-chip stocks, given up for dead earlier this year, roared back to life.

The shift was swift and fierce. Nonetheless, most analysts feel it helped restore balance to a market that had lost all sense of reason.

"The rapidity and the violence of the move was stunning, but in a bull market that's had such a long run, it's healthy," said Charles Pradilla, chief investment strategist at SG Cowen Securities in New York. "For the time being, the unbridled move up in the Nasdaq is over."

From Monday to Wednesday, the technology-dominated Nasdaq fell 466 points, or 9.2 percent below the record high of 5,048.62 set March 10. For a short time on Thursday, the Nasdaq fell farther, plunging into what Wall Street calls a "correction" — a drop of at least 10 percent that sometimes signals a turning point for the worse.

It wasn't the first time this year that the Nasdaq fell steeply. The highly volatile index tumbled 404 points from Jan. 4 to 6. From Jan. 26 to 28, it lost 280 points.

But during both of those routs, technology stocks so thoroughly ruled investor sentiment that the broader market collapsed, too, unable to function without its brash, successful leaders.

This time, however, investors shoved the money they pulled from technology stocks into old-fashioned blue-chips and other consumer product and industrial stocks, a shift so strong that the Dow Jones industrial average smashed through its record for a one-day point gain, rising 499.19 on Thursday.

Fueling the move were large money managers who tried to capitalize quickly on the shift in market momentum.

"Five years ago, there would have been four committee meetings before moving money around like this," said Pradilla. "Today, the meetings occur on the fly and you just do it."

For the week, the Dow gained 666.41 points, or 6.7 percent, its biggest weekly point gain ever, and its best percentage gain since 7.9 percent in August 1984.

The Dow's newfound strength was enough to lift the entire market higher — including the now-vulnerable tech stocks.

The Nasdaq, which lost 466 points from Monday to Wednesday, gained back nearly half of the decline by Friday, leaving it only 250.49 points lower at week's end.

The balance between the stocks of the old and new economies had — at least momentarily — been restored.

"The market was acting a bit more rationally," said Ned Riley, chief investment strategist at State Street Global Advisors. "Investors realized that (blue chips) have fallen about as much as they're likely to fall, and at this point, they're very good bargains."

The market's volatility has increased this year because so many investors have given up their old "buy and hold" philosophy in favor of momentum-driven trading.

Technology stocks caught fire because their success last year attracted more and more money — from institutional clients, frenzied day traders, and ordinary folks who retooled their 401(k) plans and mutual funds to focus on the market's top performers.

The problem was that the Nasdaq's velocity was unsustainable, prompting the stocks of many small tech companies — such as semiconductor component maker PMC Sierra — to double in less than three months.

"The valuations of many of those stocks had become ludicrous," said Riley.

Ironically, Nasdaq's turnaround began when the market's composite index first closed above 5,000 on March 9. Computerized "sell" programs kicked in with the big new milestone, and selling gathered steam as investors used the 5,000 mark as an excuse to take profits.

The last straw came on Tuesday, when President Clinton announced an agreement with Great Britain to openly share genetic research. While the true impact of the agreement isn't yet clear, fast-rising biotechnology companies that plan to sell such data saw their share prices sliced in half.

That debacle inflicted wide-ranging damage on investor psychology.

"There are a lot of unproven companies on the Nasdaq, and they can make investors' attitudes shift very quickly," Riley said. "Their fortunes have not been tested through various market and economic cycles."

Ultimately, analysts expect technology stocks to resume their leadership in the market. As companies begin reporting their first-quarter earnings in mid-April, most market watchers expect established technology companies to outperform their "old economy" brethren while Internet companies that aren't profitable will at least show rising revenues.

"The Nasdaq stocks — computers, networking, the Internet — are the ones that are really changing the world," Pradilla said. "For the most part, we still want to be in tech."

The Nasdaq ended its wild week with a gain of 80.74 on Friday, closing at 4,798.13.

The Dow Jones industrials, meanwhile, wrapped up their blockbuster week with a modest decline. The blue-chip index fell 35.37 to close at 10,595.23.

The Standard & Poor's 500 index rose 69.40 points during the week. On Friday, the index rose 6.00 to close at 1,464.47.

The Russell 2000 index of smaller companies fell 29.03 for the week. The index rose 0.54 on Friday to end the week at 574.78.

The Wilshire Associates Equity Index, which represents the combined market value of all NYSE, American and Nasdaq issues, ended the week at $14.27 trillion, up $321.54 billion from last week. A year ago, the index was at $11.80 trillion.

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