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Nasdaq Drops Toward Recent Lows as Microsoft Gives Way

With the software giant's support gone for now, tech traders are struggling to stem big losses throughout the sector.

When it happened to JDS Uniphase (JDSU) , when it happened to Qualcomm (QCOM) - Get Qualcomm Inc Report, investors could take it in stride. But to see Microsoft's (MSFT) - Get Microsoft Corporation Report stock nearly halved in the space of four months? That is an entirely different thing. This was not some highflying newcomer, some outfit with no history. This was Microsoft, until recently the company with largest market capitalization in the world.

Microsoft's warning after close on Thursday that its earnings would not grow as quickly as Wall Street expected led to a spate of downgrades this morning and a heavy selloff that has infected the entire technology sector.

"We're in the middle of a nightmare," said Matt Johnson, head of Nasdaq trading for

Lehman Brothers

. "The market has lost its leader in Microsoft."

The stock's 16.3% decline has left the

Nasdaq Composite Index

struggling to find its footing. The measure lately was down 184, or 5.1%, to 3459, having traded as low as 3394.92. The magic number is 3321, the Nasdaq's closing level in the selloff a little more than a week ago.

"It looks like we're going to test the lows of Friday a week ago," said Johnson. "There are just no buyers around."

Microsoft's dour outlook, with its suggestion of slower PC sales, obviously casts a pall on boxmakers, component manufacturers and semiconductor companies. But some of the stocks that are getting hit worst have only secondary connections to the PC. Internet stocks were getting whacked --

TheStreet.com Internet Sector

index lately was down 37, or 4.7%, to 754. Wireless stocks such as Qualcomm, down 7%, and

Nokia

(NOK) - Get Nokia Oyj Report

, down 4.7%, were also getting hit.

One wonders if Microsoft's latest news is reminding some investors that even the best things can end, that one cannot assume that earnings will grow at a near viral rate forever and ever. And so, valuations come down.

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'We're in the middle of a nightmare," said Lehman's Matt Johnson. 'The market has lost its leader in Microsoft.'

For all the havoc in the Nasdaq, it has not been such a bad day on the

New York Stock Exchange

; in fact, the

NYSE Composite

lately was up 0.3%. The

Dow Jones Industrial Average

was up 34, or 0.3%, to 10,878, which is pretty amazing when one considers that Microsoft was knocking about 64 points out of the index. Pharmaceutical, cyclical, consumer, financial and retail stocks were all higher.

"The thing that surprises me is that the strength in these Old Economy stocks is not translating into much of a recovery in the Nasdaq," said Richard Dickson, technical analyst at

Scott & Stringfellow

in Richmond, Va. "I would have thought that some psychological support would be given to the Nasdaq."

Though perhaps it is not such a surprise that the Nasdaq is getting no succor from the NYSE; recall that as the Nasdaq surged, NYSE stocks couldn't get out of their own way. After their huge moves last year, it may be a while before Nasdaq stocks perform well again.

"The Nasdaq is going to have to go through a process that is going to take a while," said Steve Goldman, market strategist at

Weeden

in Greenwich, Conn.

The

S&P 500

was off 10, or 0.7%, to 1425. The small-cap

Russell 2000

was down 12 1/2, or 2.6%, to 469.

Market Internals

New York Stock Exchange:

1,111 advancers, 1,642 decliners, 483 million shares. 18 new 52-week highs, 36 new lows.

Nasdaq Stock Market:

1,039 advancers, 2,912 decliners, 833 million shares. 15 new highs, 101 new lows.

For a look at stocks in the midsession news, see Midday Stocks to Watch, published separately.