When Is a 2.7% Drop No Big Deal? When You're in This Market

Like a Swiss Army knife, perspective is a handy tool.

On the surface, today's 2.7% loss by the Nasdaq Composite Index looks gruesome. But the downturn is less troubling considering the index set seven consecutive all-time highs prior to today, and had risen 8.7% since Jan. 1 and 68% since Oct. 8 heading into the session.

Major Indices INDEX CHANGE % VALUE YR TO DATE Dow 145.21 -1.5% 9474.68 +3.2% S&P 500 24.36 -1.9% 1239.52 +0.8% Nasdaq 63.77 -2.7% 2320.82 +5.8% Russell 2000 5.77 -1.3% 427.36 +1.3% TSC Internet 46.12 -7.8% 542.07 +33.3% TREASURY BOND CHANGE VALUE YIELD 30-Year 1 11/32 100 15/32 5.218%

Similarly, losses for blue-chip indices, while substantial, are less noteworthy in the wake of recent advances.

The bond and the dollar also reversed trend today, both rising sharply after the Bank of Japan intervened to prevent the dollar from falling further vs. the yen. The greenback closed up 3.40 yen at 112.38. That helped the price of the 30-year Treasury bond rise 1 11/32 to 100 15/32, its yield falling to 5.22%.

The Dow Jones Industrial Average closed down 145.21, or 1.5%, to 9474.68, after trading as low as 9451.77.

On a day when tech suffered, IBM (IBM Quote) was fittingly the biggest negative influence on the Dow, followed by a handful of components with multiple-point losses.

For once, the Dow aptly portrayed the broader market as weakness in members such as American Express (AXP Quote), Merck (MRK Quote) and Alcoa (AA Quote) reflected losses in their respective sectors.

The S&P 500 shed 24.34, or 1.9%, to 1239.54, having traded as low as 1238.25. The Russell 2000 shed 5.77, or 1.3%, to 427.36.

The Nasdaq Comp closed down 63.58, or 2.7%, to 2321.01, its eighth-biggest point decline in history.

Weakness was evident in most tech bellwethers, notably Cisco (CSCO Quote) and Microsoft (MSFT Quote); the Nasdaq 100 lost 3%.

Ahead of its profit report, Intel (INTC Quote) closed down 2.9%. After the bell, the chip giant report fourth-quarter earnings of $1.19 per share, 12 cents ahead of the 31-analyst estimate. Chip stocks stumbled overall; the Philadelphia Stock Exchange Semiconductor Index slid 3.6%.

The other big tech name reporting earnings, Yahoo! (YHOO Quote), experienced tremendous volatility. After rising as high as 443, the portal giant tumbled as low as 370, recovered to as high as 422, then slid again before being halted at 402 as its earnings were released. After the bell, Yahoo! posted fourth-quarter profits of 21 cents a share, a nickel ahead of the 25-analyst estimate, and set a 2-for-1 stock split.

Internet stocks overall closed down, but well off intraday lows. TheStreet.com Internet Sector index shed 46.12, or 7.8%, to 542.07, but up from its nadir of 516.21.

Still, Internet names headed the list of Nasdaq decliners, including Broadcast.com (BCST Quote), Network Solutions (NSOL Quote) and eBay (EBAY Quote).

"The New Year's celebration is officially ended," said Robert Froehlich, chief investment strategist at Scudder Kemper Investments. "This isn't fundamentally driven because the first few days of the year weren't about fundamentals. There are enough issues out there -- the day-to-day saga in Brazil, the impeachment trial, and Japan -- that whenever the market has a strong upward rise like we had the first week of January, you can bet you're going to have to give some back."

In Brazil, the Bovespa shed 7.6% after President Fernando Henrique Cardoso was forced to pledge that Brazil will honor its debt obligations amid concerns to the contrary.

The possibility of a Brazilian debt default and/or currency devaluation is "the single greatest issue our market faces this year," Froehlich said, because such an occurrence would likely be followed by similar moves elsewhere in Latin America and a second round of devaluations in Southeast Asia.

But the oft-optimistic strategist remains confident Brazil will "do the right thing." He also believes the U.S. market's weakness will not last long.

"This is the only week you've got to dodge the bullet," Froehlich said. "Get through this week and you'll see the market move forward and earnings will be the fuel. There is no doubt earnings will surprise on the upside, not because companies are doing that well, but because we lowered expectations and the economy grew much stronger in the fourth quarter than any Wall Street economist thought."

In New York Stock Exchange trading 794.5 million shares were exchanged while declining stocks whipped advancers 2,171 to 881. In Nasdaq Stock Market action 1.109 billion shares traded -- the ninth-busiest day in Nasdaq history and a record fifth consecutive session with more than a billion shares traded -- while losers led 2,472 to 1,646. New 52-week highs edged new lows 37 to 36 on the Big Board and 151 to 31 in over-the-counter trading.

Readerman and the Search for Fair Value

The losses in Netland were well overdue, even according to some staunch Internet proponents.

"At the end of the day, these are just common stocks, and at the end of the day, common stock represents a claim on an earnings stream," said David Readerman, director of Internet research and partner at Thomas Weisel Partners. "It's a question of what kind of growth rate, what kind of discount rate do you want to price it at. The euphoria as we've all seen [means] there have been phenomenally great expectations in terms of the growth outlook for this market. We do have to step back and say, 'What is the absolute value really worth?' That process of stepping back and saying, is an AOL really worth $80 billion? That reality check is something we all need to do."

Readerman officially joined Weisel Partners yesterday. Previously he was a senior managing director and director of software and Internet research at NationsBanc Montgomery Securities. Readerman's migration to former Monty chief Thomas Weisel's new firm was expected, as was reported last week.

The analyst will maintain coverage on some individual stocks but has yet to publicize the names or recommendations.

As for the sector itself, recent gains have stemmed -- in part -- because "portfolio managers that missed the rally, that didn't participate in the Internet stocks in 1998, are piling into these names," the research said. "Certainly Yahoo!'s results after the close [will be] an important leading indicator. The question is how big of an upside needs to be delivered for the stock to have an uptick tomorrow morning. There's no question Yahoo! is a great franchise but the market is wrestling with what is a fair valuation, as it is on all these names."

Readerman could not be reached after Yahoo!'s earnings were released.

Among other indices, the Dow Jones Transportation Average shed 79.67, or 2.4% to 3206.65; the Dow Jones Utility Average rose 1.17, or 0.4%, to 308.58; and the American Stock Exchange Composite Index lost 7.67, or 1.1%, to 699.65.

Market data above are preliminary. Updated numbers and Tuesday's Company Report will follow this story.