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Massive Tech Selloff Finds Traders
Trying to Keep Cool

By Aaron L. Task

SAN FRANCISCO -- Anyone who didn't get the message about the vulnerability of tech stocks from Abby Cohen's comments on March 28 or last Tuesday's action got another harsh reminder today.

Major Indices
+0.7% 11,186.56 -2.7%
S&P; 500
-0.8% 1504.46 +2.4%
-5.8% 4188.20 +2.9%
Russell 2000
-4.5% 518.66 +2.8%
TSC Internet
-8.8% 960.05 -16.8%
10-Year Treasury
105 10/32 5.783%

The group was soundly battered after several analysts -- notably Merrill Lynch chief market analyst Richard McCabe and Christine Callies, U.S. investment strategist at Credit Suisse First Boston -- joined the "avoid techs " bandwagon. Meanwhile, blue-chips moved cautiously higher behind notable strength in financials.

The Nasdaq Composite Index fell 258.25, or 5.8%, to 4188.20, suffering its second-biggest point loss in history and eighth-biggest percentage decline.

Still, traders took today's decline largely in stride, noting that trading volumes were relatively light, little evidence of panic selling was observed and volatility has seemingly become the market's only consistent characteristic.

"The investment community is wrestling with this tremendous opportunity in the Internet world vs. the question of what valuation do you put on it," observed Robert Harrington, co-head of block trading at PaineWebber. "I think this is something that's going to be with us -- this back and forth."

Harrington noted the opposite trend was evident Friday and suspected some of today's selling was a "retracing" of that move (and then some).

"We want to stick with companies that have good earnings visibility and growth potential, which are trading at reasonable valuations" vs. those companies without earnings or hopes thereof, he said. "In the endgame, those will be the ones that will win. In the meantime, the momentum will be swinging one way or another day-to-day."

But Anthony Cecin, manager of Nasdaq trading at U.S. Bancorp Piper Jaffray in Minneapolis, was less sanguine.

"It was very quiet, but today was definitely cause for concern," Cecin said. "I was disappointed in the action. I thought we might have some follow-through from Friday's rally but the downside pressure was fairly relentless."

Cecin noted today's decline "took away" the majority of the rally that emerged last Wednesday through Friday. "All you're left with is the snapback from Tuesday's" midday low, he said. "Whether that leaves the market fairly valued is the billion-dollar question," but the action suggests a retest of last week's intraday lows is more likely.

The Pundits Among Us

The momentum was clearly swinging away from tech today, leading to lots of utterances of terms such as "rotation" and "divergence" between the so-called Old and New Economy stocks. That verbiage may be cliched and oversimplify the reality, but seemed starkly accurate today and was the focus of the pundits who contributed to its happening.

Merrill's McCabe described the movement out of tech and into Old economy stocks in the past month (or so) as the beginning of an "important corrective trend" that will continue.

Separately, Callies wrote the "rotation out of funds into non-technology areas of the equity market is a bona-fide portfolio reweighting," and predicted as much as $2 trillion could be reallocated out of tech and into other sectors over the next several quarters.

(Gail Dudack, equity market strategist at Warburg Dillon Read, also issued a report today, suggesting the Nasdaq could fall as low as 3650. But Dudack has long been skeptical about tech-stock valuations, so it was unclear what impact her call had beyond just adding to the nervousness.)

Meanwhile, McCabe acknowledged the likelihood of "periodic rallies" for what he called the "faltering New Economy/tech issues," and recommended investors use those rebounds to "reduce exposure to technology stocks that have declined by 40% to 50% or more from their recent highs."

Indiscriminate Tech Selling

Investors seemed unable to discriminate between tech stocks that have fallen by those amounts and those which have held up better. Across-the-board selling hit established leaders such as Sun Microsystems (SUNW:Nasdaq), Intel (INTC:Nasdaq)and Yahoo! (YHOO:Nasdaq), as well as erstwhile highfliers such as QXL.com (QXLC:Nasdaq), which fell 23.1%.

The Nasdaq 100 fell 6.8% while TheStreet.com Internet Sector index fell 92.52, or 8.8%, to 960.05 and the Philadelphia Stock Exchange Semiconductor Index lost 4.5%.

Notable tech losers included Intuit (INTU:Nasdaq), which fell over 20% after First Boston downgraded its recommendation.

Elsewhere, business software developer J.D. Edwards (JDEC:Nasdaq)fell 20.2% on news its CEO had resigned.

Software makers in general were hard hit, from Microsoft (MSFT:Nasdaq) to smaller names such as i2 Technologies (ITWO:Nasdaq) and Vignette (VIGN:Nasdaq).

While tech stocks suffered, it was sunny on the blue-chip side of the street. After trading as high as 11,287.70, the Dow Jones Industrial Average closed up 75.08, or 0.7%, to 11,186.56 behind standout strength in financial components American Express (AXP:NYSE), J.P. Morgan (JPM:NYSE) and Citigroup (C:NYSE).

In general, financials were the biggest beneficiaries of the rotation out of tech stocks and the continued downward movement in bond yields. The Philadelphia Stock Exchange/KBW Bank Index rose 2.9% while the American Stock Exchange Broker/Dealer Index climbed 3.9%.

Other strong groups included drugmakers and paper product companies as value stocks, in general, outpaced growth stocks. The S&P; Barra Value Index rose 0.4% while its growth counterpart slid 1.8%.

The S&P; 500 fell 11.89, or 0.8%, to 1504.46 owing to the heavy influence of those growth stocks while the Russell 2000 dropped 24.33, or 4.5%, to 518.66.

In New York Stock Exchange trading, 858.9 million shares were exchanged while declining stocks led advancers 1,606 to 1,376. In Nasdaq Stock Market action 1.4 billion shares traded while losers led 3,047 to 1,205. New 52-week highs bested new lows 48 to 26 on the Big Board while new lows led 74 to 46 in over-the-counter trading.

Among other indices, the Dow Jones Transportation Average fell 15.41, or 0.5%< to 2843.13; the Dow Jones Utility Average rose 6.18, or 2.1%, to 299.26; and the American Stock Exchange Composite Index declined 30.65, or 3.1%, to 958.04.

The price of the 10-year Treasury note rose 17/32 to 105 10/32, its yield falling to 5.78%.

For coverage of today's top stocks in the news, see the Company Report, published separately.

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