Those well-known names that lie at the core of any growth fund portfolio you might care to mention -- the


(CSCO) - Get Report



(ORCL) - Get Report

and so on -- did not succumb to the tech selling as soon as their lesser peers. But when they did begin to drop in earnest, the decline was vicious.

It was, in short, almost a textbook selloff. When the

Nasdaq Composite first began to drop, it wasn't stocks like

Sun Microsystems

(SUNW) - Get Report

, but rather things like






that got taken out to the woodshed. In fact, the biggest tech stocks actually


during this period as spooked investors moved money into only the best-known, most-liquid names. So even though the

Nasdaq Composite

hit its top March 10, the total value of the top 10 stocks (by market capitalization) in the index actually kept growing after. Not until March 28 did the big stocks begin to turn lower.

O, How the Mighty

Source: Baseline; Research

Investors no longer viewed the problem as isolated to companies with no earnings and pie-in-the-sky expectations. There was something more systemic going on: Tech valuations in general had gotten ahead of themselves. For a few weeks in March, the mantra had been "high-quality tech," with some managers professing the belief that these stocks would hold well through the selling. From March 27 to a May 23 low, the total capitalization of the top 10 Nasdaq stocks fell to $1.74 trillion from $2.55 trillion. The declines in just 10 stocks had wiped $810 billion off America's portfolio, and nobody was intoning that "high-quality" stuff anymore.

Depressing as this is, it also suggests that the Nasdaq has found, or is very close to having found, its footing again.

"They usually take down the strongest stocks at the end of a correction," explains

Lehman Brothers

chief technical analyst Steve Shobin, "so I think the recent selloff in stocks such as Sun and Cisco might show that this phase of the correction has come to an end." Shobin also notes that there were not nearly as many new 52-week lows on the Nasdaq in the most recent downturn as in the mid-April downdraft. While the big dogs were getting their teeth kicked out, most stocks were beginning to stabilize.

If the Nasdaq has, in fact, touched bottom -- if even the big stocks have seen the worst of it -- it may be time for the old leadership to reassert itself. That is what happened in previous tech selloffs. In the current iteration, however, there's reason to think that not all the top-performing stocks will keep their leadership positions.

Source: Baseline;


"I think there's a knee-jerk buy, but I don't think they're all going to work," says


Canelo, U.S. investment strategist at

Morgan Stanley Dean Witter

. "You have the beginning of a reversal in the Nasdaq, but it's not universal. Some of the more reasonably valued stocks, they have bottomed, and there's a beginning of a recovery process starting now."

Stocks whose price-to-earnings ratios far exceed their growth rates will not do nearly so well as those whose P/E-to-growth-rate ratios, or PEG, are low, says Canelo. They certainly did not do as well during the decline -- stocks whose PEGs were less than 2 fell, on average, less than 10%, while those whose PEGs were above 3 fell 39%. That experience has led investors to consider a little more deeply how much they are paying for growth.

"We're going to have a more discriminating growth-stock manager," thinks Canelo. "Investors are differentiating on the basis of PEG ratios. The lower the better now."