Optical networking darling

Nortel Networks

(NT)

clocked the market in the head at the open this morning, and the major indices were lately struggling back groggily.

Nortel, which warned of slowing optical sales for the year after the closing bell yesterday, was lately down 26.6%. It was the most actively traded stock on the

New York Stock Exchange

and was showing the largest point and percentage drops on that exchange. The company revised its outlook for optical equipment sales for the year to $10 billion from a previous $12 billion.

TheStreet.com

took a close look at Nortel's news in a

separate story.

Analysts jumped on the stock, perhaps a little too late.

Lehman Brothers

cut its ratings on Nortel and fellow optical-networking leader

JDS Uniphase

(JDSU)

, which reports earnings tomorrow. Lehman also cut its 12-month price target on Nortel, as did

UBS Warburg

.

Merrill Lynch

reiterated the company as a near-term buy.

So what's the big deal? Of course, earnings and revenue numbers always matter during earnings season. But it's the company forecasts for earnings and revenue in coming quarters that matter even more this season, as investors worry that what appears to be an economic slowdown will cut into corporate profits.

What's more, the elite optical networking group -- which includes such darlings as JDS Uniphase,

Cisco

(CSCO) - Get Report

,

Ciena

(CIEN) - Get Report

,

SDL

(SDLI)

and

Corvis

(CORV) - Get Report

-- were seen by some as the next tech sweet spot. These stocks were left relatively unscathed by the September and early October selloff -- until early this week.

Nortel's malaise quickly spread to the rest of this sector this morning. JDS and Cisco were the most actively traded stocks on the

Nasdaq Composite Index, this morning, down 15.3% and 2.7%, in that order. Ciena was sinking 15% to $115, SDL was 16% lower, and Corvis was falling 11.3%.

On the

Dow Jones Industrial Average, strength in defensive stocks was countering weakness in techs and telecoms. Airline

Boeing

(BA) - Get Report

-- lately up 3.5% to $63.13 -- and financial

J.P. Morgan

(JPM) - Get Report

-- up 2.7% to $149 -- were adding some 36 points to the upside.

TheStreet Recommends

But PC-maker

Hewlett Packard

(HWP)

and telecom

AT&T

(T) - Get Report

were pulling their weight to the downside, with a combined 37 points of negative pressure. AT&T was lately down 8.4%.

H-P was getting slammed after computer-maker

Compaq

(CPQ)

said that fourth-quarter earnings miss analyst estimates of $0.41 by 4 cents last night, blaming the

beleaguered euro for its troubles. H-P was off 3.6%; Compaq, though, was up by 1.9%.

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Sector Watch

Internet stocks were almost the only happy, safe place to be in tech today after

Amazon

(AMZN) - Get Report

spread its good news last night. The industry Goliath reported a narrower-than-expected loss of 25 cents a share vs. expectations of 33 cents and expressed optimism about the crucial fourth quarter. The retailer's stock is currently some 74% off its 52-week high of $113, but it was lately up about 14.6%.

Amazon anticipates sales of $950 million to $1.05 billion and expects that pro forma losses will represent 5% to 8% of sales. By March 31, or the end of its first quarter, the company plans to have $700 million in cash and marketable securities.

TheStreet.com

took a close look at what the

earnings mean for Amazon.

Biotech has also fallen back into favor as a tech haven and was playing that role today. The

Nasdaq Biotechnology Index

was 2.1% higher to 1305.6.

Otherwise, investors were furiously throwing their money at defensive stocks such as drugs. The

American Stock Exchange Pharmaceutical Index

was 0.8% higher to 423.8, led by Merck

(MRK) - Get Report

which was hit a new 52-week high of $86.88 after reporting strong earnings Friday. It was lately up 1.2%, to $86.50.

Financials continued to do well, also.

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Bonds/Economy

Bonds were modestly higher this morning, following a down day yesterday.

The benchmark 10-year

Treasury note was down 7/32 at 100 21/32, to yield 5.663%.

The 30-year

Treasury bond was at 107 8/32, 14/32 lower, to yield 5.737%.

The

Mortgage Applications Survey

(

definition |

chart |

source

) for the week ended Oct. 20, rose to 587.2 from 498.6 in the previous week. Refinancings continue to rise, while the purchase index slipped to 298.7 from 311.1.

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