Two Markets Diverge -- Dow Surges, Nasdaq Crumbles

And this is only Monday.

Investors seized on the Nasdaq Composite Index's early Microsoft (MSFT Quote)-led negativity with a vengeance, burying the tech-heavy Nasdaq under a loss of 349.15, or 7.6%, to 4223.68 -- the worst point loss and fifth-worst percentage loss in history. They threw their money into the resurgent Dow Jones Industrial Average, which rose 300.01, or 2.8%, to 11,221.93.

Major Indices INDEX CHANGE % VALUE YR TO DATE Dow 300.01 2.75% 11,221.93 -2.4% S&P 500 7.39 0.49% 1505.97 +2.4% Nasdaq -349.09 -7.63% 4223.74 +3.8% Russell 2000 -23.01 -4.27% 516.08 +2.2% TSC Internet -108.66 -9.82% 998.41 -13.5% TSC New Tech 30 -102.68 -13.87% 637.72 +3.2% NOTE CHANGE PRICE YIELD 10-Year Treasury 10/32 103 31/32 5.961%

The Dow's startling gain, its sixth-largest point rise ever, in the face of widespread tech panic demonstrates investors' faith in the market's resilience.

With participants remaining confident in stocks as an asset class, they're still making the technology sector the object of their burning wrath, and today was the extreme example of the two divergent ways of thinking. The equation right now for investors is pretty simple: Hate tech, and love most other stuff.

Nowhere is that more evident in the market averages. The Nasdaq has lost more than 16% of its value since closing at a record 5048.62 on March 10, while the Dow is up 13% in that same time period. The Dow closed at 11,221.93 today, and that's despite 76 points of negative drag from Microsoft. (See our index page for a full roundup of Microsoft antitrust coverage.) Twenty-seven of the 30 Dow industrials finished the day higher. The S&P 500 was mixed, rising 7.39 to 1505.97.

"The optimism, and all the flow of funds, had been into the tech sector at the expense of everybody else," said Bruce Bittles, market strategist at J.C. Bradford in Nashville, Tenn. "There's no more sponsorship left. At that same token, for Dow-type stocks like financials and cyclicals, nobody had interest and the potential for sponsorship was there."

The Comp was trampled underfoot from the get-go, on the expectation of an unfavorable ruling in the Microsoft suit. It obliterated any chance for the Nasdaq to build on Friday's rebound from what was an entirely forgettable week for the tech sector.

Microsoft investors woke up this morning and got themselves a gun, after the mediator, Judge Richard Posner, said this weekend that he'd given up trying to effect a settlement between Microsoft and the Justice Department.

The stock performed about as well as the Seattle Kingdome did March 26, losing 14.8% to 90 13/16 on 130 million shares, making it the Nasdaq Stock Market's most active by a long shot. (It accounted for 7.6% of total Nasdaq Stock Market trading today.) The company lost a whopping $79 billion in market capitalization today, dropping it to third place in terms of market cap (behind General Electric (GE Quote) and Cisco (CSCO Quote)).

Other technology sectors were similarly crushed, as investors continued to revalue the sector harshly.

"You basically have a situation where sellers beget more sellers, and that's what's happening here," said Tim Grazioso, manager of Nasdaq trading at Cantor Fitzgerald, about 20 minutes before the close.

The Morgan Stanley High-Tech 35 lost 5%, and the Nasdaq Telecommunications Index lost 7% today, as technology's war horses, no matter what color, were shuffled off to the glue factory. Cisco bested Microsoft's market cap despite losing 4 1/8 to 72 15/16, and America Online (AOL Quote) dropped 2 1/4 to 65.

No More Shaking Off Bad News

"If you think back, one of the characteristics of the tech rally was the ability for the market to shake off bad news," said Richard Dickson, technical analyst at Scott & Stringfellow in Richmond, Va. "What's happening is, Microsoft is perhaps bringing to surface deeper problems with tech right now. We had a rebound on Friday and it evaporated -- we've got more problems in techland."

But several years of 20%-plus returns in the stock market have bred an endemic level of confidence in stocks, so much so that bullish types still don't seem overly alarmed, despite 3-to-1 negative breadth on the Nasdaq today.

They continue to offer the usual platitudes when talking about the tech decline: that this had to happen sooner or later; that the rise was so quick, it was bound to cause a similarly disruptive, violent decline.

That's not to say there aren't concerns. Until today, the prospect that selling would ensue because of margin calls seemed far-fetched. Margin debt isn't a problem when the market is going up, but it gave rise to worry, mostly because that's what investors do when they're not trading. But now Bittles is beginning to think that panicked selling will take over, rather than aggressive revaluing of tech.

"I don't think we're there yet, where margin calls come into play," Bittles said. "But a lot of leverage has been used in these things and that's how you get into panics. If you get margin calls, then you get forced liquidation and you create a panic."

Earnings Outlook Still Strong

It's ironic that it would happen now, because analysts are expecting generally strong news on the earnings front for the entire market, even though analysts have been revising estimates for tech companies down, according to Joseph Kalinowski, strategist at I/B/E/S. Expected earnings growth for a basket of 79 New Economy stocks for the first quarter 2000 is 27.6%, down from 29.6% last month, he said. That's still strong growth.

Yahoo! (YHOO Quote), one of the more well-regarded Internet companies, lost 6.5% today, ahead of its Wednesday earnings report.

"Maybe some sort of a blowoff will create some sort of buying opportunity as soon as we see what they have to say, if Yahoo! reports well," said Grazioso.

Being a dot-com couldn't save you today, as TheStreet.com Internet Sector index dropped 9.8%. eBay (EBAY Quote) was crushed, losing 18% to 143 1/4. B2B player VerticalNet (VERT Quote) lost 24% to 52 5/8.'What's happening is, Microsoft is perhaps bringing to surface deeper problems with tech right now,' said Richard Dickson of Scott & Stringfellow. 'We had a rebound on Friday and it evaporated -- we've got more problems in techland.'

TheStreet.com New Tech 30 plummeted 102.68, or 13.9%, to 637.72. The index, launched in January, tracks the kind of go-go companies that serve as a magnet for the market's hot money. Quotes on the index are available at http://www.thestreet.com/newtech/.

Level 3 Communications (LVLT Quote) dropped 8% to 98 1/2, CMGI (CMGI Quote) lost 13% to 100, and Qualcomm (QCOM Quote) declined by 8 7/16 to 140 3/4.

AOL was the New York Stock Exchange's most active, with 20 million shares changing hands.

Going Into Stocks, Staying in Stocks

The Philadelphia Stock Exchange Semiconductor Index fell 7%, led by volatile Rambus (RMBS Quote), which dropped 11% to 256 15/16, and Motorola (MOT Quote), which lost 5% to 138 3/4.

Does the tech sector decline mean more people are going to take up smoking? Certainly seems that way -- the American Stock Exchange Tobacco Index tacked on 6% today, led by Dow component Philip Morris (MO Quote), which added 10%, and RJ Reynolds (RJR Quote), which rose 14%.

"What'd you'd seem to argue is, rather than a flight to safety, with money going into bonds, money is going into stocks and staying in stocks," said Dickson. "Why are chemical stocks going crazy? Why the bank index? Maybe we won't get 40, 50% growth in these areas, but we'll get good growth."

The S&P Chemical Index gained 4.9% today.

Banks were strong again. Dow component Citigroup (C Quote) gained 2 1/16 to finish at 62 7/16, an all-time closing high, and fellow Dow hand J.P. Morgan (JPM Quote) rose 10 to 141 3/4. The Philadelphia Stock Exchange/KBW Bank Stock Index gained 5.8% today.

Interestingly, the price-weighted Wilshire 5000, the broadest measure of the entire stock market, lost 1.2% today. Tech stocks make up 29% of the Wilshire's performance. Small-cap stocks were also a drag on the overall market, as the Russell 2000 lost 4.3% of its value today.

Kohl's (KSS Quote), a department store retailer, hit another all-time closing high today, ending the day at 104 11/16, up 1 5/8. The stock rose more than 30% in the last month. The S&P Retail Index gained 5.6% today.

The bond market was quiet. The benchmark 10-year Treasury note gained 10/32 to 103 31/32, dropping the yield to 5.96%. The 30-year bond was up 10/32 to 106 7/32, dropping the yield to 5.81%.

Market Internals

Breadth was positive on the NYSE, horrific on the Nasdaq.

New York Stock Exchange: 1,569 advancers, 1,486 decliners, 1.027 billion shares. 65 new highs, 42 new lows.

Nasdaq Stock Market: 1,138 advancers, 3,167 decliners, 1.715 billion shares. 57 new highs, 157 new lows.

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For a look at stocks in today's news, see the Company Report, published separately.