Dow Falters, but Nasdaq Ends Higher

Updated from 4:05 p.m. EDT

Blue-chips fell for a third straight session Thursday, but they closed well above their worst levels for the day as investors brushed off disappointing economic data and a slew of analyst downgrades.

Tech stocks, meanwhile, registered impressive gains as networking issues and Internet stocks recovered somewhat from recent losses.

The Dow Jones Industrial Average, which dipped in and out of positive territory for most of the afternoon, ended down 23 points, or 0.27%, to 8671. The S&P 500 slipped 0.07, or 0.01%, to 917 but the Nasdaqwas up 21 points, or 1.62%, to 1335.

"I think we had some short covering because the selling started to dry up," said Barry Berman, head of Nasdaq trading at Robert W. Baird. "But there are a lot of people out so it's tough to make judgments."

Volume on the New York Stock Exchange reached 1.17 billion shares, while Nasdaq volume hit 1.4 billion shares. Breadth was positive, with winners beating losers 18-13 on the Big Board and 19-14 on the Nasdaq.

The Dow was down as much as 136 points earlier, and the Nasdaq had been down 19 points, or more than 1%. The Nasdaq is down about 4% since Monday, and the Dow has lost 2.7%. The S&P 500 has fallen 3%.

Inside the market, chip stocks held up nicely after a 3% drop in the early going. The Philadelphia Stock Exchange Semiconductor Index closed a touch higher. Chip issues had fallen 10% over the last two days, sparking concern that the broader market was in for another sharp decline. The performance of chip companies is often considered an important indicator for the entire economy because semiconductors are used in everything from home appliances to cars.

Networking stocks also saw respectable gains, climbing 2.8%, after plunging 6% Wednesday on the heels of a revenue warning from Nortel Networks ( NT). Nortel rose a penny to $1.05 after a 15% drop Wednesday.

Among Internet stocks, Yahoo! ( YHOO) was a leader, rallying 12% to $10.25 after Merrill Lynch raised its rating on the stock to neutral from sell.

The banking sector also gained ground after a rocky start. The Wall Street Journal reported that Salomon Smith Barney's practice of allocating hot IPO shares to banking clients has prompted Congress to consider expanding its corporate-malfeasance probes to include the activities of other big firms.

Although the market improved throughout the session, disappointing economic data and downgrades on several companies did add some pressure.

The number of U.S. workers filing first-time applications for unemployment benefits rose last week by 8,000 to 403,000, above economists' expectations for a reading of 385,000. The four-week moving average, which smoothes out weekly fluctuations, also climbed to its highest level since July 6.

Rising unemployment is seen as one factor that could potentially tip the economy back into recession. Some think that could force already-tired and debt-laden consumers to tighten their purse strings.

More bad news came from the Commerce Department, which reported that after-tax profits rose just 1.7% in the second quarter, down from 2% in the prior quarter. Second-quarter GDP was left unchanged, however, at 1.1%. The final second-quarter GDP number will be out next month.

Meanwhile, UBS Warburg downgraded four chip stocks Thursday, primarily because of their valuations. The firm cut Novellus ( NVLS) and Logicvision ( LGVN) to buy from strong buy and lowered Lam Research ( LRCX) and Newport ( NEWP) to hold from buy.

Micron Technology ( MU) was down 3% to $17.25 after Morgan Stanley downgraded the chipmaker to underweight from equal-weight.

Also weighing on investor sentiment was an estimate cut on General Electric ( GE). Lehman Brothers now expects GE to earn $1.76 in 2003, down from its prior projection of $1.81, because of lower expectations for GE's pension income in 2003 and the cost of expensing stock options, among other factors. GE shed 3% to $30.35.

In the retail sector, Footstar ( FTS) lost 16% to $11.45 after posting a 5% drop in August same-store sales and warning that third-quarter earnings would miss estimates by a wide margin. Competitor Finish Line ( FINL) also took down its guidance.

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