Tech Sells Off as Blue-Chips Cling to Meager Gains

Nasdaq dropped nearly 3% in another divergent day in the market.
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On transports! On small-caps! Go cyclicals and airlines! Now where's that road?

The aforementioned rallied nicely, but with

Rudolph

-esque (and we don't mean

Nureyev

,

Valentino

or

Giuliani

) tech stocks unable to climb out of a deep funk, the Christmas-like atmosphere on Wall Street defrosted like so many turkeys.

For the second straight day, distinctive divergences emerged, leaving market traders bemused. As was the case

yesterday, the

S&P 500

and

Nasdaq Composite Index

ended with losses. Both the

Dow Jones Industrial Average

and

Russell 2000

closed with gains, but each fell far from its intraday heights.

The Nasdaq Comp finished at its session low, down 76.02, or 2.9%, to 2507.48. The S&P 500 lost 21.32, or 1.6%, to 1328.50.

"I'm seeing what would look like the beginning of a short-term pullback in the S&P and Nasdaq," said Ronny Kraft, CEO of

Gotham Capital Management

, a New York-based hedge fund. "If we get another day or two of this we'll have some major tops on the charts. There's an amazing divergence: The Dow for the first time has gone parabolic. The technicians are going to have a field day with this.""

The Dow industrials rose as high as 10,526.54 before closing up just 16.65, or 0.2%, to 10,411.66. Still, the index established its sixth record in the past eight sessions.

Tech investors focused more on

Intel's

(INTC) - Get Report

cautious comments about revenues rather than its better-than-expected earnings. Once again, the vast majority of technology's bellwethers ended with losses. The

Nasdaq 100

fell 3.3% and the

Morgan Stanley High Tech 35

lost 1.3%.

The influence of technology's biggest names was reflected in the fact market internals belied the performance of major proxies.

In

Nasdaq Stock Market

activity 1.41 billion shares were exchanged -- the busiest day in Nasdaq history and seventh straight plus-billion-share session -- while gainers led retreaters 2,207 to 1,925. In

New York Stock Exchange

trading, 956.4 million shares were exchanged while gainers led losers 1,737 to 1,281. New 52-week highs bested new lows 106 to 62 on the Big Board and by 162-98 in over-the-counter trading.

Meanwhile, the

Philadelphia Stock Exchange Semiconductor Index

rose 1.3%, inspired largely by chip-equipment makers

KLA-Tencor

(KLAC) - Get Report

, which rose 7.5% after reporting better-than-expected profits, and

Teradyne

(TER) - Get Report

, up 5.5%.

Pacing the Dow's gains were so-called deep cyclical plays such as

Alcoa

(AA) - Get Report

,

Caterpillar

(CAT) - Get Report

,

United Technologies

and

International Paper

(IP) - Get Report

. Outside the Dow, the cyclical sector continued its recent ascent; the

Morgan Stanley Cyclical Index

gained 4.4%.

"The 'Dogs of the Dow' have been getting smacked this year, but today they're having a huge day," Kraft said.

Had the Dow gained at least 75 points today, it would have "moved outside its standard deviation" for the first time since the beginning of 1994, he observed. Despite pulling back from intraday highs, the Dow's move today was encouraging in the context of recent gains and the fact it's "doing it with a total absence of technology," he said.

"I think it's a real healthy-type correction where lagging sectors are catching up," added one block trader who requested anonymity. "Now you're seeing deeply oversold, friendless stocks -- beaten-down sectors -- showing signs of life. I wouldn't have thought it possible, and still don't based on way the market rolled over."

The trader noted the performance of the aforementioned Dow components and others such as

U.S. Steel

(X) - Get Report

, which climbed 9.5%. "The market cap of the whole steel industry is $15 billion," he said. "That's net change in AOL on a tough day."

Transports were also big gainers, led by airlines such as

AMR

(AMR)

and

US Airways

(U) - Get Report

. The

Dow Jones Transportation Average

rose 146.88, or 4.5%, to 3443.32 while the

American Stock Exchange Airline Index

jumped 4.7%.

J.P. Morgan

(JPM) - Get Report

was among the Dow industrials' leading lights after wildly exceeding analysts' earnings expectations, but finished well off its intraday best of 140 1/16. The financial giant closed up 2.8% at 132 7/8 as many of its peers suffered late in the session. The

Philadelphia Stock Exchange/KBW Bank Index

slid 0.9% while the

American Stock Exchange Broker/Dealer Index

shed 5.6%.

Dow losers were led by drug makers

Merck

(MRK) - Get Report

and

Johnson & Johnson

(JNJ) - Get Report

, retail giant

Wal-Mart

(WMT) - Get Report

, consumer favorite

Procter & Gamble

(PG) - Get Report

and oil giant

Chevron

(CHV)

.

As with their cyclical counterparts, the Dow's losers' performance was reflective of broader market developments. The

American Stock Exchange Pharmaceutical Index

lost 4.4%; the

Amex Retailing Index

shed 3.2%; the

Morgan Stanley Consumer Index

dipped 1.3%; and the

Amex Oil & Gas Index

fell 1.2%.

A big change from yesterday was the general faltering of the Internet's biggest names, such as

America Online

(AOL)

,

Yahoo!

(YHOO)

and

Amazon.com

(AMZN) - Get Report

.

Additionally,

Infoseek

(SEEK)

shed 24.5% after reporting a second-quarter loss of 39 cents a share.

TheStreet.com Internet Sector

index fell 82.08, or 10.6%, to 694.10, while

TheStreet.com E-Commerce Index

shed 11.01, or 7.5%, to 135.15.

Despite sliding from its intraday high of 425.55, the

Russell 2000

outperformed the S&P 500 for the fourth straight session, rising 0.15, or 0.04%, to 417.39.

Inflation, Anyone?

With the long bond back above 5.50%, "I think stock prices come into question," Kraft said. "Right now, we're adjusted for disinflation; there's almost a defensive bias.

Fed

members are defending the fact there is no inflation. It's almost absurd."

Noting recent gains in prices for commodities such as paper and oil, the hedge fund manager said investors have been lulled into complacency.

With the most recent

CPI

and

PPI

reports, "they're not seeing the full representation of the move in oil in March," he said. "The tell will be in the next monthly CPI and PPI. I think inflation is there.

Cyclical stock performance is the tell we're perhaps going into the next phase of the market."

Among other indices, the

Dow Jones Utility Average

shed 6.42, or 2.2%, to 291.59; and the

American Stock Exchange Composite Index

slid 1.68, or 0.2%, to 736.12.

The price of the 30-year Treasury bond fell 8/32 to 96 6/32, its yield rising to 5.51%.

Wednesday's Company Report

By Heather Moore
Staff Reporter

(

Earnings estimates from First Call; new highs and lows on a closing basis unless otherwise specified. Earnings reported on a diluted basis unless otherwise specified.

)

As noted above, J.P. Morgan picked up 3 9/16 to 132 7/8 after rising as high as 140 1/16 after posting a first-quarter profit of $3.01 a share, blowing away the 11-analyst estimate of $1.73 and moving up from the year-ago $1.80.

Today's wave of cyclical love kissed few harder than those of the transportation variety.

Delta

(DAL) - Get Report

, ahead of tomorrow's earnings report, flew 2 11/16 to 71 3/16;

Northwest Airlines

(NWAC)

rose 2 5/8, or 9.4%, to 30 9/16;

Continental Airlines

(CAIB)

flew 2 1/4, or 5.5%, to 43 5/16; US Airways added 1 to 55 3/8; and AMR jumped 3 11/16, or 5.7%, to 69.

Also as mentioned earlier, yesterday's Internet winners were today's losers.

Florida Banks

(FLBK)

plunged 14 1/16, or 45.3%, to 17 after

Wachovia

lowered its recommendation to neutral from buy. Similarly,

Net.B@nk

(NTBK)

sank 63 15/16, or 27.3%, to 172 and

Sovereign Bancorp

(SVRN)

sank 3, or 17.3%, to 14 11/16.

Mergers, acquisitions and joint ventures

Casella Waste Systems

(CWST) - Get Report

climbed 3, or 14.6%, to 23 9/16 after announcing it will terminate its merger agreement with

KTI

(KTIE)

unless KIT allays its concerns about a variety of financial and operational issues. KTI slid 1 5/8, or 17.1%, to an annual low of 7 7/8.

priceline.com

(PCLN)

surged 9 1/2, or 11.7%, to an all-time high of 93 1/8 on news of a five-year marketing deal with

First USA

, a unit of

Bank One

(ONE) - Get Report

, which lost 7/8 to 57 1/4. The companies said the deal could mean $200 million in revenue for priceline.com and millions of new accounts for First USA.

The

Nihon Keizai Shimbun

reported that

Sony

(SNE) - Get Report

and IBM have agreed to jointly develop and market digital editing systems for TV broadcasting. Their first client will be

CNN

, which will pay them at least 5 billion yen, the paper said. Sony picked up 9/16 to 99 5/16; IBM fell 5/8 to 179 3/8.

Earnings/revenue reports and previews

@Home

(ATHM) - Get Report

gave up 22 13/16, or 12.5%, to 159 1/16 even after last night meeting the 14-analyst consensus with a first-quarter operating loss of 7 cents a share vs. the year-ago loss of 10 cents.

E-Tek Dynamics

(ETEK)

swelled 6 3/16, or 14.3%, to an all-time high of 49 1/2 after reporting third-quarter earnings of 14 cents a share vs. the seven-analyst consensus of 11 cents and year-ago earnings of 6 cents. The company also said CEO Michael Fitzpatrick was named to the added post of chairman.

U.S. Bancorp Piper Jaffray

upped its recommendation to buy from neutral.

Identix

(IDX) - Get Report

expanded 1/2, or 6.9%, to 7 3/4 after saying it sees third-quarter revenue coming in flat with the year-ago period and that it expects to post a quarterly loss. The three-analyst estimate called for earnings of 2 cents a share vs. the year-ago loss of 3 cents.

Inprise

(INPR)

declined 5/16, or 8.9%, to 3 1/4 after warning it expects a first-quarter loss of 54 cents to 56 cents a share, including charges, vs. the three-analyst view for break-even results. The company hired

Hambrecht & Quist

to weigh whether it should split into two. Inprise also appointed Dale Fuller interim president and CEO, replacing Delbert Yocam, who -- along with CFO Kathleen Fisher -- was asked to leave March 31.

Intel sliced off 3 9/16, or 5.9%, to 57 after

last night posting first-quarter earnings of 57 cents a share, 2 cents above the 33-analyst forecast and well ahead of the year-ago 36 cents. But the chipmaker said second-quarter revenue may be flat to slightly lower than the first quarter's $7.1 billion. Today,

Credit Suisse First Boston

started coverage with a buy.

KLA-Tencor excelled 3 7/16, or 7.5%, to 49 after reporting third-quarter profits of 22 cents a share, including a gain. The 17-analyst forecast called for operating earnings of 14 cents vs. the year-ago 34 cents.

Lucent

(LU)

jumped 2 7/16 to 59 3/8 after saying its second-quarter earnings will meet or exceed the 30-analyst outlook of 15 cents a share, thus quelling rumors to the contrary.

Seagate

(SEG)

advanced 1 9/16, or 5.9%, to 28 3/16 after reporting third-quarter profits of 49 cents a share, reversing a 10-cent loss a year earlier and besting the 10-analyst consensus by 3 cents. However, the disk-drive maker forecast that fourth-quarter revenue will be "flat" sequentially.

In other earnings news:

Offerings and stock actions

Sagent Technology

(SGNT:Nasdaq) rocketed 6 9/16, or 72.9%, to 15 9/16 after 5 million shares were offered via an IPO at 9.

Oracle

(ORCL) - Get Report

tacked on 9/16 to 24 1/8 after its board added 85 million shares to its stock-buyback plan.

Analyst actions

Biomatrix

(BXM)

dropped 9 11/16, or 10.8%, to 80 5/16 after

Prudential Securities

cut the stock to accumulate from strong buy.

TheStreet.com

this afternoon

reported on Biomatrix's travails.

Infoseek dropped 19 11/16, or 24.5%, to 60 3/8 after

BT Alex. Brown

cut the stock to buy from strong buy. Last night, the company reported a second-quarter loss of 39 cents a share vs. the nine-analyst estimate for a loss of 41 cents.

Sprint PCS Group

(PCS)

sloughed off 8, or 14.4%, to 47 1/2 after

Morgan Stanley Dean Witter

lowered its recommendation to neutral from strong buy.

Xoom.com

(XMCM)

gave back 11 3/8, or 12.1%, to 83 after spiking yesterday on news the company was in a deal to sell a large stake to a suitor but that the deal fell through. Today,

BancBoston Robertson Stephens

started coverage with a buy.

Ziff-Davis

(ZD)

slipped 3/8 to 18 5/8

Merrill Lynch

upped its recommendation to accumulate from neutral.

Miscellany

Dow Chemical

(DOW) - Get Report

hopped 8, or 7.9%, to an all-time high of 109 1/2 after unveiling its Liquid Armor corrosion-inhibited deicer.

First Sierra Financial Services

(FSFH)

dropped 1 1/4, or 6.8%, to 19 3/4 after announcing plans to set up a business-to-business Internet bank.

Harris

(HRS)

added 5 5/8, or 20.1%, to 33 5/8 after saying it will spin off its Lanier Worldwide office equipment unit to shareholders to focus on its communications equipment business. As part of the reorganization, the company will cut 300 to 400 jobs, resulting in annual savings of $20 million to $30 million.

Indymac Mortgage

(NDE)

shot up 2 1/16, or 17.5%, to 13 7/8 on news the company plans to do more business online rather than through brokers.

Raytheon

(RTN) - Get Report

rose 4 3/4, or 7.4%, to an all-time high of 68 13/16 on expectations that recent developments in Kosovo will raise demand for the company's missiles.

As originally published this story contained an error. Please see

Corrections and Clarifications.