SAN FRANCISCO -- Rarely have so few people been so happy with a 24-point loss, as the

Nasdaq Composite Index

posted today. After trading as high as 2291.69 and as low as 2185.91, the index rallied back to close off 1.1% at 2244.99.

Still, that's the Comp's lowest close since Jan. 4, 1999, and -- more importantly perhaps -- it left the index below its Jan. 3 intraday lows of about 2252, around which market participants fought a pitched battle in an incredibly volatile session.

In other words, those defending an already tattered bullish flag failed to hold the line, despite claims of victory that the Comp climbed off its session lows. Think of the

Battle of Little Round Top relived from the Confederate point of view.

Other major averages experienced less drama but nearly as much volatility. The

Dow Jones Industrial Average

closed up fractionally at 10,526.81 after trading as high as 10,566.19 and as low as 10,372.43. The

S&P 500

closed down 0.2% to 1252.82 after trading as high as 1259.94 and as low as 1228.33.

Most troubling to some, the

Nasdaq 100

fell 1.3% to 2032.42, its lowest level since June 14, 1999. Cautious comments from

Brocade

(BRCD)

last night and concerns about

EMC

(EMC)

were the excuse du jour for selling big-cap tech stocks.

The hope for those long is that the Nasdaq's losses weren't steeper, and that the recovery came with nary an encouraging word (or intermeeting rate cut) from

Alan Greenspan

. Additionally, there's something called the "marginal new low" theory, which states (essentially) that when an index, or stocks, closes slightly below a key level, as the Nasdaq did today, the end result is to frighten away many investors just before a rally phase emerges.

But that's something for technicians to ponder. From the perspective of a fundamental investor such as Doug Kass, general partner of hedge fund

Seabreeze Partners

, such technical issues are worthless (apologies,

Gary B.

).

"What matters," Kass said, is daytrading retail investors and institutions led by the $180 billion

Janus Capital

have became the market's "dominant investors." But they are "nondiversified, narrow-oriented" investors.

Kass compared the market's current dominators to Wall Street's bank trust departments in the late 1960s and early 1970s. After that era's Nifty Fifty imploded, those trust departments were forced to continually sell their holdings for years, literally. Using

IBM

(IBM) - Get Report

from the mid-1970s to the early 1980s as an example, he described the "constant order torture" that went on as the trust departments steadily exited once massive holdings.

Kass fears a repeat performance is unfolding now, noting Janus owned 266 million shares of

Nokia

(NOK) - Get Report

, 182 million shares of

Cisco

(CSCO) - Get Report

, nearly 77 million shares of

EMC

(EMC)

and 22 million shares of

Nortel

(NT)

, according to a Feb. 15 13F-HR filing with the

Securities and Exchange Commission

.

"Who is the buyer of last resort on 270 million shares of Nokia?" Kass wondered, speculating that other institutional investors won't return to those once-beloved tech bellwethers -- and those are just a sample of Janus' holdings -- "until the valuation contraction is as absurd at the bottom as

the valuation expansion was at the top."

Kass is not alone in citing mass selling by Janus and other growth funds as the primary force behind the Nasdaq's recent woes. Scott Bleier, chief strategist at

Prime Charter

, for example, has been on the

warpath regarding the mutual fund industry. (Janus, meanwhile, came under additional scrutiny today because of revelations key employees have filed to sell more than 50% of their stake in the fund company.)

Like Bleier, Kass does not believe the current downturn will end until the level of fear is commensurate with the level of greed evident in late 1999-early 2000. Unlike Bleier, he doesn't believe we've come close, yet.

"The risk is you get huge redemptions in equity market funds which continue almost unabated" for years, Kass said. "I'm not saying the world is coming to an end, but the implications are frightening. People are getting obliterated. Why does it stop here?"

Kass believes most of his short-selling counterparts either went out of business because of the market's ascent from the lows in September 1998 or acquiesced to the tech juggernaut at just the wrong time. The implication being that those long can no longer rely on short-covering rallies for anything more than fleeting advances.

Kass declined to discuss the size of his fund, but said it produced gross returns of 88% last year and 87% in 1999. Still, he isn't arrogant about being able to forecast the market and gave just 25% odds to the "fairly horrible scenario" described above.

Currently, Seabreeze Partners is 50% long and 40% short -- a "boring, neutral position," Kass declared. "I'm not sure if I should be covering or not."

The hedge fund's short positions include

Amazon.com

(AMZN) - Get Report

,

Palm

(PALM)

,

Handspring

(HAND)

, and

Research in Motion

(RIMM)

. But he has recently covered short positions on Nortel, EMC, Cisco and

Corning

(GLW) - Get Report

.

The latter are "very good companies," but only meet one of the three criteria that he said are necessary to buy a stock: Is it the right company, at the right price and at the right time?

They are the right companies, but this isn't the right price and it certainly isn't the right time to "dip into the abyss," Kass said. "This market is not going to lift anytime soon. Rallies will be short-lived and brief."

Kass conceded you must "stay liquid" for the possibility that another intermeeting rate cut by the

Fed

sparks another big rally (however short lived), but was unmoved that easing can change the fundamentals.

"I've long felt lower financing costs will not clear up the over-capacity in everything from bandwidth to PCs to wireless handset to optical cable," he said. "A protracted period of build-out doesn't end with what Brocade, or any other company looking for a back-end-loaded year, suggested."

PS: Some of you are no doubt ready to send me flame email for quoting a guy like Kass -- who

Herb Greenberg

once described as "a bear's bear" -- during already fearful times. Before you do, ask yourself how much good those who've expressed and/or maintain an optimistic spin on the market have done you in the past year.

Speaking of which...

Be sure to read Part 2.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.