With Monday's 41-point run-up in the Nasdaq reminiscent of the 37-point bounce last Wednesday that was eliminated -- and then some -- by week's end, there's no way around it: We are officially sliding back into a tech bear market.

By "officially," I mean that old rule of thumb that says when stocks in a market or market sector drop more than 20%, it stops being a correction and starts being a bear market.

Many of the most closely watched stock indices have moved close to losing a fifth of their value -- if they haven't done so already -- from the high points they reached since the last bear market a few years ago. Some have already lost more than that.

Before Monday's move higher, the Nasdaq 100 -- watched by some as a large-cap tech index even though there are plenty of nontechs in it -- closed down 18% Friday from its 2006 high. Sector-specific indices, like the Amex Internet and Morgan Stanley High-Technology, were down 19% and 20%, respectively. By the end of this week, they could find themselves squarely into bear territory.

Once there, they will find familiar company: By Friday, the Nasdaq Telecommunications Index was down 26% from its recent highs, and the Philadelphia Semiconductor Index was down 31%.

The sense that this may be something darker than a chance to buy on dips took root after a week of bad earnings news. Dell ( DELL) was down 11% Friday after warning -- yet again -- of disappointing earnings. PMC-Sierra ( PMCS) and Packeteer ( PKTR) were down more than 20% in one day on disappointing earnings -- joining Yahoo! ( YHOO) in the goat parade on Wall Street.

The term "bear market" seems to have been creeping back into popularity for a few months. Take a look at the Google Trends (a helpful analytical tool to chart how search queries of a particular term have grown more or less popular over time): Starting in May, the number of people typing "bear market" into Google's ( GOOG) search engine started to grow, and it accelerated as the month wore on. That's just around the time when many of the tech titans started the declines that they seem unable to pull themselves out of.

Of course, the 20% selloff mark is really an arbitrary point. But whenever major indices drop below it, it tends to have a crystallizing effect on the thinking of investors. Some pare back their long-term holdings. Some see it as a contrarian chance to buy into an oversold correction.

Tech's Dark Days
Index 7/24/2006 2006 High Change
Nasdaq 100 1482.34 1761.46 -16%
AMEX Internet 160.4 192.64 -17%
Morgan Stanley High-Tech 461.01 562.89 -18%
Nasdaq Telecom 174.42 228.19 -24%
Philadelphia Semiconductor 391.93 559.6 -30%
Source: Yahoo! Finance, NYSE, Amex, Nasdaq

Who's right this time?

Despite Monday's run-up, the way many tech stocks declined last week suggests there's still a good deal of fear in the air. Companies like AMD ( AMD), with strong earnings but weak revenue, got whacked (and whacked again after news of its merger with ATI Tech ( ATYT)).

Some of the week's gainers, like Apple ( AAPL) and Microsoft ( MSFT), won out by beating previously lowered forecasts. Microsoft and eBay ( EBAY) tempered uninspiring guidance with news of buybacks -- a move that tech companies often take when their own financials aren't buoying up the stock price.

As a whole, money managers seem to be giving up on a tech rally at least for the rest of the year. As Jim Cramer pointed out on his radio show last Tuesday, institutional investors are pouncing on any sign of strength, such as Wednesday's flickering rally, as an opportunity to sell: a classic bear market mentality.

Also on Thursday, the New York Stock Exchange said short interest -- the number of short positions not yet closed out and a gauge of bearish sentiment -- rose to 9.3 billion shares in mid-July from 9.1 billion in June, the fifth straight monthly increase. The short ratio rose to 6.1 from 4.9.

Most of the stocks that saw the largest gains in short interest were tech brand names: Verizon ( VZ), up 75% to 34 million shares; Analog Devices ( ADI), up 121% to 11 million shares; L-3 Communications ( LLL), up 221% to 6 million shares; LSI Logic ( LSI), up 311% to 30 million shares; and Computer Sciences ( CSC), up 487% to 17 million shares.

The sharks are circling their prey. In addition, individual investors are not interested in picking up the slack. Margin debt has dropped steadily since April. TrimTabs Financial said $4.4 billion has flowed out of U.S. equity funds in the past month, much of it from tech funds. And the American Association of Individual Investors said Thursday that 58% of investors were bearish, up from 39% last week. Only 24% are bullish.

Some investors regard such bearish numbers as contrarian signs to buy -- and Monday's session suggests that they're probably right. But for how long? The real test will come after the inevitable bounce in tech shares, whether yesterday's session was the start of it or not. If investors begin to see reasons their businesses will improve in 2007 or 2008, then this may prove to be nothing more than a severe summer correction.

The thing is, it's hard to imagine right now what those reasons might be. Most tech companies are living off the revenue of innovations they came up with years ago. In fact, the high-tech industry -- from hardware to telecom to the Internet -- is starting to act like the drug industry: happy to revise their greatest hits instead of striking out in new directions.

In the tech world, growth is driven primarily by innovation. And innovation comes from boldness and risk. Wall Street seems to be afraid that Silicon Valley has lost its mojo. That may well prove to be an overreaction. But if not, we're in for another long winter in the bear den.

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