The War Rages and the Generals Are Starting to Fall

A selloff is something like siege, with the advancing army slowly encroaching on the castle's fortifications. First one battlement falls, then the next. The foot soldiers with the pikes are overrun, the archers get cut down.

Then they kill the generals.

Major Indices INDEX CHANGE % VALUE Dow -199.44 -1.9% 10,427.06 S&P 500 -29.58 -2.09% 1377.61 Nasdaq -171.92 -5.07% 3218.48 Russell 2000 -17.47 -3.63% 462.27 TSC Internet -48.51 -5.89% 775.32 NOTE CHANGE PRICE YIELD 10-Year Treasury +16/32 100 16/32 6.428%

Stocks were down sharply at midday, with selling concentrated in big technology issues. These are companies that lay at the core of many portfolio holdings like Cisco (CSCO Quote), down 3.6%, Sun Microsystems (SUNW Quote), off 5.7%, and Oracle (ORCL Quote), down 8.2%. All are stocks that did not get hit by the first wave of selling in March -- in fact, they went higher as investors sold secondary positions and retreated to core holdings. All are now below their April lows.

"There's nothing but big-cap tech for sale," said Matt Johnson, head of Nasdaq trading for Lehman Brothers. Mutual funds "have been raising cash for the past month and a half, and that is continuing."

Traders are speculating that funds, which have whittled away their holdings so that little but core positions are left, must now reduce even these positions to raise cash.

"I would think that any mutual fund would have to be liquidating, in case there are redemptions," said Jim Volk, co-director of institutional trading at D.A. Davidson.

That's brought the Nasdaq Composite down below its closing low of the year. It was lately down 166, or 4.9%, to 3225. And though the so-called old-economy stocks of the Dow Jones Industrial Average held up a bit in the early going, they fell under the selling. The Dow was down 190 to 10,436.

Only three components, Caterpillar (CAT Quote), McDonald's (MCD Quote) and ExxonMobil (XOM Quote) were flashing green.

The broader S&P 500 was down 28 to 1379. Small-caps, too, were doing poorly: the Russell 2000 was off 17 to 462.

TheStreet.com Internet Sector Index was down 45 to 779.

Bad as the selloff has been, some believe that a bottom, albeit a temporary one, will form soon.

"We've got a short-term selloff that's going to lead to an oversold condition very quickly," said Phil Roth, chief technical analyst Morgan Stanley Dean Witter. But, Roth adds, "The tech sector was so extended on the upside it's going to take many months to finish this correction. The final low of the year is unlikely to come in the spring, more likely in the fall, and probably below 3000," on the Nasdaq.

Johnson concurs, believing that a tradable bottom will come soon, but that it will not mean the troubles are over for tech.

"This is a marketplace that was fueled by momentum," he said. "Tech investing for the past couple of years hasn't been just investing; it's been the trend, the hot thing to do."

Market Internals

New York Stock Exchange: 871 advancers, 1,872 decliners, 486 million shares. 22 new 52-week highs, 87 new lows.

Nasdaq Stock Market: 732 advancers, 3,142 decliners, 898 million shares. 13 new highs, 220 new lows.