It's not looking good for the chip sector.

Following some disastrous downgrades on some semiconductor names this morning, the

Nasdaq Composite Index was lately parked firmly in the red. The

Dow Jones Industrial Average zig-zagged from the green into the losing zone.

Semiconductor stocks were a mess after

Salomon Smith Barney

and

Lehman Brothers

downgraded semiconductor-equipment makers

Altera

(ALTR) - Get Report

and

Xilinx

(XLNX) - Get Report

.

Salomon said it downgraded the stocks because of a continued deterioration in the market for general-purpose semiconductor chips. Lehman said that, while it expects both companies to report better-than-expected earnings per share from revenue growth, it predicts that revenue growth for the next two quarters is likely to slow noticeably as inventory levels rebalance.

Altera was lately down 27.7% to $29.56; Xilinx was lower by 27.2% to $57.63.

Other sector names were suffering, including

KLA-Tencor

(KLAC) - Get Report

, down 10.4% to $32.13, and

Lattice Semiconductor

(LSCC) - Get Report

, down 11% to $42.63.

The

Philadelphia Stock Exchange Semiconductor Index

, known as the SOX, was down 9.9% to 708.1. Bellwether

Intel

(INTC) - Get Report

was slipping another 1.9% after a month of free fall during which its market capitalization was cut almost in half.

The analyst comments on semiconductors were hurting

IBM

(IBM) - Get Report

, after the company announced plans to invest $5 billion to expand its chip-making business. Following the recent barrage of tech earnings warnings, the market has begun to fear that IBM might also report earnings below estimates, and possibly even pre-announce an earnings warning. IBM reports earnings on Oct.17. IBM was off 3.4% to $113.94.

On the Dow, strength in drug stocks

Merck

(MRK) - Get Report

and diversified industrial

United Technologies

was outpacing weakness in IBM and financials like

J.P. Morgan

(JPM) - Get Report

and

Citigroup

(C) - Get Report

.

Financials were weak ahead of the onset of earnings season for the sector. Reports on earnings from banking companies start coming out this week, but the bulk of this sector's earnings is set to hit the market next week.

After over a month of slogging lower through the nastiest earnings

preannouncement season in a

long

time, today kicks off

earnings season, with Internet bellwether

Yahoo!

(YHOO)

and telecom and semiconductor equipment firm

Motorola

(MOT)

scheduled to report their earnings after the close today. Yahoo! was lately rising, while Motorola was sinking.

DaimlerChrysler

(DCX)

was one of the

NYSE's heroes after the European Union said it had approved the automaker's plans to buy diesel-engine manufacturer

Detroit Diesel

(DDC)

.

"There's a reason why investors are going to hold tight and sit tight. They're not going to make any strong commitments, because you've got earnings from Motorola and Yahoo! after the close and a rise in oil prices," said Hugh Johnson, chief investment officer at

First Albany

.

A few companies that warned of earnings warnings last night, such as

Central Parking

(CPC)

and

Silicon Graphics

(SGI)

, were catching hell from investors. Central Parking was down 8.7% to $17.75, and Silicon Graphics was down 6.5% to $3.63.

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Sector Watch

Brokerage stocks were seeing a third day of weakness after getting badly hit Friday by concerns of margin calls and chatter over rumored losses on junk-bond trading. Investors are worried that trading-related losses will hurt the revenues of the big brokerages.

TheStreet.com

wrote about one brokerage's

denial of the rumors as well as a

preview of financial services sector earnings. The

American Stock Exchange Broker/Dealer Index

was 1.4% lower to 593.5.

Banks and insurance companies were also weaker. The

Philadelphia Stock Exchange/KBW Index

was down 2.6% to 835.2 and the

S&P Insurance Index

was off 0.2% to 755.2.

Oil and gas stocks were once again flying on rising oil prices. The

American Stock Exchange Oil & Gas Index

was up 2.7% to 545.1, while the

American Stock Exchange Natural Gas Index

was 4% higher to 231.3.

Cold weather and escalating tensions pushed oil prices about 65 cents higher overnight. U.S. oil reserves are already at a 24-year low, and a number of refineries are reducing their capacity this month for maintenance.

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Bonds/Economy

Bond prices were under pressure as oil was trading at a two-week high in response to Middle East strife and falling temperatures. Rising oil prices alarm bond investors because they threaten to lift the overall inflation rate. There are no major economic releases today.

Investors in

Treasury Securities are also concerned about a possible onslaught of new corporate bonds, which compete with Treasuries for investor dollars.

Unilever

(UN) - Get Report

,

Telecom Italia

(TI)

,

France Telecom

(FTE)

and

British Telecom

(BTY)

are all expected to float multi-billion dollar bonds before the end of the year. The Unilever deal is expected by the end of next week. The timing of the rest is uncertain, but they are considered likely to come this month.

The benchmark 10-year

Treasury note lately was down 3/32 to 99 12/32, lifting its yield to 5.833

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