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It is one thing to rise with the tide, quite another to stay afloat in a storm.

Until today, the optical-equipment makers had done the latter. Even as tech got trod upon and other once-hot sectors fell like pins, companies like









were able to hang tough, sporting valuations that would make Graham & Dodd blush. Even as the rest of the


got taken out to the woodshed, investors cooed over how much glass (the cool way of saying fiber-optic cable) would be laid in the next few years. Soon the world would be riding a beam of light.

Nortel disappoints...

and optical players plunge

But when you are priced for perfection, you must execute perfectly.



, whose third-quarter revenue from its optical-equipment business

fell well short of Wall Street expectations, did not. Nortel fell 29% Wednesday, and the entire sector lemminged after it.


"NT caught everybody by surprise," says Brian Finnerty, head of trading at

C.E. Unterberg Towbin

. "Of course, in retrospect we could see the writing on the wall."

It does seem a bit foolish to have assumed that somehow, with the rest of tech in the obvious throes of a capital-expenditure slowdown, optical equipment would somehow be immune. It seems foolish to fall into the same old trap of looking at recent growth rates and extrapolating them far, far into the future. But of course, there were people raising these very same concerns months and months ago. It didn't matter, because the optical-equipment companies kept blowing past expectations.

"All these areas which were bulletproof are showing that they are affected by the economy, and the slowdown in spending patterns," says Jim Volk, co-director of institutional trading at

D.A. Davidson

. "Everybody's concept of the growth rates were obviously too high. Their expectations of continued quantum leaps in growth were not there."

Job of Work

Nor, if past declines are any indication, have the opticals hit bottom here.

"Our sense is that, in this area, there's more work to be done," says Jeff DeGraaf, senior technical analyst at

Lehman Brothers

. "We're seeing the same kind of speculation or enthusiasm around this decline as we saw in the semiconductor decline."

DeGraaf noted that when



issued its third-quarter warning in September and the whole chip complex got whacked, investors were still buying more call options -- bets that a stock will go up -- than puts in the sector. That was a sign that there was still a lot of unbridled enthusiasm for the sector, and that there was still room for a lot more pain. Similarly, in the big optical names today, far more calls than puts have traded.

This may not bode poorly for the rest of the tech market, though. Investors may be realizing only now that the optical emperor wears no clothes, but just about all the other former highfliers have been looking buck naked for a while now. While the Nasdaq market in general deteriorated through the day, stocks with good news, like



, were spared the carnage. A few weeks ago, that might not have been the case.

"That tells you the trend of the market is clearly up," says John Bollinger, president of

. "As we make the transfer from the October lows, we should see an improving psychology which drives the market higher."

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