Tracking the Microsoft/Nasdaq Debacle

After the worst point drop in Nasdaq history amid concern over the Microsoft ruling, <I>TheStreet.com</I> picks through the rubble.
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Monday Microsoft Meltdown Misery

SAN FRANCISCO -- We all know what excuses are like and everybody had a big juicy one to sell tech stocks on Monday. For those yearning for an end to the selling in the tech sector, that is both good and bad news.

Last week, you'll recall, market players were sifting through the comments from

Abby Cohen

and (to a lesser extent)

Mark Mobius

as well as the demise of

Tiger Management

for clues to the tech stock selloff. While those developments may not have logically resulted in selling four-letter favorites, the news about

Microsoft

(MSFT) - Get Report

did present a more reasonable excuse.

Microsoft lived up to its moniker "Mister Softee" in the most unpleasant sense, melting nearly 15% after the mediator in its antitrust case

ended hopes for a settlement. As was widely expected, Judge Thomas Penfield Jackson issued a ruling around 5 p.m. EDT Monday.

"The Court concludes that Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market," the

ruling reads. "Microsoft also violated the

Sherman Act

by unlawfully tying its Web browser to its operating system."

If you're looking for analysis about how the whole Microsoft vs. the government situation will play out, check out my colleague

Jim Seymour's

commentary. My intent is to look at how Microsoft's decline affected the markets and market psychology.

(For a Microsoft history, see the

Microsoft Trial Timeline.)

In reaction to the Microsoft news, the

Nasdaq Composite

fell 349, or 7.6%; its worst point loss in history and fifth-biggest percentage decline.

That, of course, is the "bad" news (for those long).

Despite the carnage, market players reported little evidence of panic selling even as the tech sector unraveled. No "bids wanted" orders from brokers, heavy put buying, extraordinary high volume or other signs you might expect with the Comp off so huge. Heck, the

CBOE Market Volatility Index

-- the VIX --

fell

5.7% Monday, suggesting some market players were feeling comfortable as opposed to terrified.

"There wasn't hysteria here today," said Gregg Schreiber, vice president of institutional futures sales at

Bear Stearns

. "I would say it was a tame sort of panic. People were in disbelief at the magnitude of the move but it seemed relatively orderly. I'm sure some saw it different but I did not have a sense of pandemonium."

That, of course, excludes members of the aggressive, daytrading community who were getting "blown out" of positions by margin calls, according to various market players.

Beyond the action in margin-land -- which I'm not trying to diminish or understate -- market players said there was less fear and panic Monday than last

Thursday, when the Comp fell nearly 300 points before recovering some ground in the final hour.

But the "Nasdaq doesn't go down

nearly 8% without people getting blown out because they can't take the pain or the margin clerk is calling," said Erik Gustafson of

Stein Roe & Farnham

. "There was some element of a panic sell, and with this one-day drop, I'm starting to believe we're closer to the end" of the selloff.

Being that he manages about $4.5 billion in growth stocks, including the $1.9 billion

(SRFSX)

Stein Roe Growth fund, you wouldn't expect Gustafson to be bearish on tech. And he isn't.

"We're in the middle of a painful correction courtesy of our friends in the state and federal government, but tech is still the place to be," he said (adding a few epithets for the bureaucrats that are unprintable in a family publication like

TheStreet.com

). "We'll live to fight another day."

Despite the "across-the-board pain" in technology, the fund manager noticed "more established tech companies" such as

Intel

(INTC) - Get Report

,

Oracle

(ORCL) - Get Report

,

IBM

(IBM) - Get Report

and

EMC

(EMC)

held up relatively well Monday.

The selloff also created opportunities in established tech names such as

Applied Materials

(AMAT) - Get Report

,

Novellus

(NVLS)

,

LSI Logic

(LSI) - Get Report

and

Motorola

(MOT)

, which the fund manager has been buying in the last few days, albeit "not aggressively."

As for some "new tech" names decimated to the point of attractiveness, Gustafson mentioned

Veritas Software

(VRTS) - Get Report

and

Tibco Software

(TIBX)

as favorites.

Stein Roe is long all of the aforementioned.

Meanwhile, the relative strength of tech bellwethers beyond Microsoft raises another issue. Last week, the talk among market players was how well the biggest tech names were faring vs. their newer counterparts (i.e., stocks formerly known as "highfliers").

Monday's decline in Microsoft shares begs the question of whether the Nasdaq's traditional pillars are heading for a big fall as well.

Gustafson, for one, does not believe so.

"Established tech companies caught up in the downdraft have real positive catalysts going forward," he said. "Specifically, they're going to show upside surprises in earnings. That's what is going to pull Nasdaq out of its current funk -- earnings are going to get us out of the hole."

Scott Bleier, chief investment strategist at

Prime Charter

, also disagreed with the notion that Microsoft's decline is a sign the bellwether tech shoe is about to drop.

The possibility of a 50% decline like those suffered by seemingly countless smaller tech names seems extremely remote for Microsoft, Bleier said, if only because Richard Sherlund of

Goldman Sachs

said the stock would not fall below the high-80s.

"Sherlund says 'high 80s,' so guess what? Institutions are going to be buying in the high 80s, not selling," he said. Microsoft closed regular hours trading at 90 13/16 today. In after-hours trading, the stock was recently quoted up, at 92.

As for the wider damage in many tech names, the strategist observed the decline was "exactly commensurate" with the action on the upside.

"There were no offers

to sell on the way up and there are no bids on the way down," he commented. "People who said it wasn't a frenzy were kidding themselves. Next time tech stocks rally -- the broad brush of them -- investors will be more selective."

As painful as it might be right now, that, at long last, is the "good news" in all this.

See our

index page for a full roundup of Microsoft antitrust coverage.

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 welcomes your feedback at

taskmaster@thestreet.com .