Gigantic Tech Selloff Takes Nasdaq Deeper Into Bear Country

The "out with the new, in with the old" mentality that dominated Wall Street for most of the day suddenly turned into an "out with the everything" psychology at the end of the session.

Major indices -- even the stubborn Dow Jones Industrial Average -- ended the day deep in the red, as selling pressure in a host of tech bellwethers dragged down the rest of the market.

Major Indices INDEX CHANGE % VALUE YR TO DATE Dow -161.95 -1.43% 11,125.13 -3.2% S&P 500 -33.42 -2.23% 1467.17 -0.1% Nasdaq -286.27 -7.06% 3769.63 -7.4% Russell 2000 -16.69 -3.27% 493.44 -2.2% TSC Internet -58.60 -6.47% 847.24 -26.6% TSC New Tech 30 141.81 -21% 534.47 -13.5% NOTE CHANGE PRICE YIELD 10-Year Treasury -15/32 104 2/32 5.947%

The tech-infused Nasdaq Composite Index tumbled 286.27, or 7.1%, to 3769.63, its second-largest point decline ever. Selling was fast and furious right out of the gate, and things only got uglier as the day progressed. The blue-chip Dow, on the other hand, was able to hang tough for most of the day, benefiting from the rush of money out of technology stocks and into more established Old Economy stocks.

But in the last hour of trading, the Dow got hit too, sliding 161.95, or 1.4%, to 11,125.13, well off an intraday high of just over 11,420.

Trouble seeped into the tech sector early, when Goldman Sachs analyst Rick Sherlund cut his third-quarter revenue outlook for Microsoft's (MSFT Quote) to $5.75 billion from $5.95 billion, citing faltering demand for PCs. Microsoft lost 4 1/2, or 5.4%, to 79 3/8, marking the first time the software dipped below 80, since last June.

Combined with weakness in its fellow Dow components, including Hewlett-Packard (HWP Quote), Intel (INTC Quote) and IBM (IBM Quote), the stocks accounted for about 158 points of the Dow's drop.

"If Microsoft is not going to make their numbers, what does that mean for the rest of the sector?" asked Dan Ament, assistant vice president and investment executive at Dain Rauscher in Minneapolis. "That [Goldman] revenue cut helped fuel the concern about Nasdaq stocks. Uncertainty about the PC sector effects all the other companies in the tech food chain."

Indeed the Philadelphia Stock Exchange Computer Box Maker Index was taken apart, falling 29.01, or 6.8%, to 400.77, while the Philadelphia Stock Exchange Semiconductor Index lost 94.2, or 8.3%, to 1037.7. TheStreet.com Internet Sector index was also lower, down 58.6, or 6.5%, to 847.2.

Compuware (CPWR Quote) contributed to the concern with a warning that fourth-quarter earnings would come in between 13 cents and 15 cents a share, far below the 15-analyst estimate of 35 cents. J.P. Morgan today downgraded Compuware to market perform from buy.

Despite the fact that tech selling stole the market show, there were pockets of strength in a number of cyclical stocks. Financials, consumer products, utilities and transportation stocks all ended the day in the green.

J.P. Morgan (JPM Quote) jumpstarted the financial sector when it reported first-quarter earnings of $3.37 a share, far above the 10-analyst estimate of $2.81, and up from the year-ago $3.01.

The company said strong momentum in equities, investment banking and asset management services powered its top-line growth in the quarter.

That was music to the ears of other financial titans including American Express (AXP Quote) and Citigroup (C Quote) which rose 3.7% and 0.5%, respectively. The Philadelphia Stock Exchange/KBW Bank Index rose 2%.

"Financials are still attracting a lot of capital, in part as a defensive play," said Ament. "There is also some vision at the end of the tunnel that the Fed may be near the end of raising rates," he said.

Avon (AVP Quote) beautified the consumer products sector with a rosy earnings outlook, saying it sees first-quarter earnings beating the 11-analyst estimate of 29 cents by a couple of cents. The direct seller of beauty products also said first-quarter revenue may have risen by as much as 9%. The Morgan Stanley Consumer Index rose 0.3%, while Procter & Gamble (PG Quote) lifted 2 7/8.

The Dow Jones Transportation Average gained 12.7, or 1.3%, to 1031.3, while the Dow Jones Utility Average rose 5.74, or 1.9%, to 305.8.

Looking Ahead

In the days ahead, all eyes will remain nervously fixed on the Comp to see where tech stocks are headed next.

"Since we didn't have any bounce, I would expect to open lower," said Bill Schneider, head of U.S. equity block trading at Warburg Dillon Read. "We'll see if we can work out a morning low and mount some type of credible rally," he said.

Schneider characterized today's selling as the "real thing", and said selling was orderly, not panicked, but adds "there's a fine line that divides the two."

Ament said he is hearing talk of concern from technical analysts who feel critical levels have been violated on the Nasdaq.

"That is a repeat theme, that we are down a solid 25% from the March 10 high," he said. But to keep it in perspective, he said the market was back to the levels it had hit in January.

Though he expressed concern about a glut of supply from IPOs and a number of lockup expirations from hot tech stocks, he said he continues to look at tech favorably and said there are good opportunities to be had if investors look for stocks with strong fundamentals and a good outlook.

Market Internals

Breadth was about even on middling volume on the NYSE, and really nasty on the Nasdaq.

New York Stock Exchange: 1,495 advancers, 1,453 decliners, 1.155 billion shares. 54 new highs, 42 new lows.

Nasdaq Stock Market: 1,003 advancers, 3,337 decliners, 1.896 billion shares. 23 new highs, 206 new lows.

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