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Market Rotates Hard Into Old Economy Faves as Techs Get Slapped
By Christopher H. Schmitt

With tech stocks getting hammered in recent days, it was just what a jittery market didn't need to hear -- a warning of sluggish sales in the personal computer market.

Major Indices
+0.8% 11,372.09
S&P; 500
-0.4% 1495.35
-3.8% 3903.45
Russell 2000
-1.3% 503.52
TSC Internet
-2% 888.03
10-Year Treasury
103 28/32 5.970%

The results, alas, were predictable. At midday, the Nasdaq Composite Index had taken a three-stair-step tumble, seemingly intent on grinding out a long, steady decline. It fell through the 4000 level not long after the opening, before leveling, diving again, stabilizing and finally tumbling again to a loss of 152, or 3.8%, to 3903.

The Dow Jones Industrial Average initially headed off on one of its fork-in-the-road-style splits with the Comp, trading up as much as 123.17 to 11,410.25. By midday, it had given back most of its gains and then gained some back, to stand up 85, or 0.8%, at 11,372.

The Dow's performance was particularly impressive given the heavy, heavy weight on the index from its key tech components. Besides Microsoft (MSFT:Nasdaq), on which there's more below, Intel (INTC:Nasdaq), IBM (IBM:NYSE) and Hewlett-Packard (HWP:NYSE) were sapping a huge amount of upside from the blue-chips.

"There has not been an awful lot of strength," said Jim Volk, co-director of institutional trading for D.A. Davidson in Portland, Ore. "It's been pretty much a downdraft here, led by technology."

The S&P; 500, meanwhile, was down 5, or 0.4%, to 1495. The Russell 2000 joined in the down day, falling 7, or 1.3%, to 503 1/2.

The spur for it all was bad news of a different sort for tech behemoth Microsoft. No, it didn't have anything to do with the company's continuing antitrust travails. Instead, Goldman Sachs analyst Rick Sherlund cut his revenue outlook for the March quarter.

Citing "very sluggish" growth in PC sales from November through February, he cut his forecast for fiscal third-quarter revenue from $5.95 billion to $5.75 billion. That could cost Microsoft 2 cents a share in earnings, he said, although investment gains could offset that.

Microsoft got its ears boxed on the news, falling 3 15/16, or 4.7%, to 79 15/16. That left the stock down nearly a third from its January high of 116 9/16.

The news rippled to sting other members of the tech food chain, too. The Philadelphia Stock Exchange Computer Box Maker Index was down 4.2% to 412. Likewise, the Philadelphia Stock Exchange Semiconductor Index was down 4.1% to 1086. Intel slid 3 1/8 to 127 5/8, and even highflier Cisco (CSCO:Nasdaq) stumbled, losing 3 to 67.

"They're all folded together -- no mystery, no real surprise," said Volk.

TheStreet.com Internet Sector index was off 18, or 2%, to 888, having traded as low as 861.96.

Optimism, and an Eye on the Close

Still, there was optimism amid the slide, and some saw overreaction in the market's response to the Goldman revenue forecast.

"That had been the whisper on Wall Street," said Brian Belski, chief investment strategist for George K. Baum in Kansas City, Mo. "That should not have been a surprise."

Today's key development will be the Nasdaq close, he said. "Any close above 4000 today -- that would be a major psychological and emotional positive."

Likewise, renewed interest in fundamentals -- which is helping drive the continuing flight from New Economy to Old Economy stocks -- should eventually benefit top-line tech issues, too, Belski said. "As investors levitate back to 'real' Old Economy stocks, they'll also levitate back to 'real' tech stocks," he said.

Once again, cyclical proxies revealed Old Economy strength. The Morgan Stanley Cyclical Index was up 2.2%, while the Philadelphia Stock Exchange Forest & Paper Product Index was turning in another strong performance, up 4.3%.

Market Internals

Volume continued light, in the face of general uncertainty and upcoming release of the latest batch of inflation and retail sales statistics.

New York Stock Exchange: 1,580 advancers, 1,213 decliners, 649 million shares. 37 new 52-week highs, 29 new lows.

Nasdaq Stock Market: 1,122 advancers, 2,892 decliners, 1 billion shares. 20 new highs, 139 new lows.

For a look at stocks in the midsession news, see Midday Movers, published separately.

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