SAN FRANCISCO -- Although the index bounced from its intraday low of 3345.35 -- generating a smattering of cheers that it held above the April 14 closing low -- many market players were troubled by the Nasdaq Comp's 160.37, or 4.4%, decline Monday .

The problem is not that Microsoft ( MSFT) fell nearly 15% or is down 44% from its all-time closing high. The problem is that Cisco ( CSCO) still trades at a price-to-earnings ratio of about 125 times expected 2000 earnings and 96 times expected 2001 results. And that Yahoo! ( YHOO) sports a P/E of 259 times 2000 earnings and 211 times 2001's. Oracle ( ORCL) trades at 115 times the current year's expected results and over 90 times next year's. And that Sun Microsystems ( SUNW) trades over 93 times 2000 projected earnings and over 72 times expected 2001 results. Etc., etc.

Now that a lot of excess has been wrung out of second-tier tech plays, "the risk is that the 'technology blue chips' become increasingly overvalued and overowned," Thomas McManus, equity portfolio strategist at Banc of America Securities, wrote today.

McManus reduced his equity weighting to 75% from 80%, simultaneously increasing his bond allocation to 25% from 20%. The action reverses an allocation change he made -- with some accompanying fanfare -- just one week ago. A key reason for the strategist's about-face was the sense investors are too complacent -- especially about tech leaders -- because of the snapback rally early last week.

Microsoft's struggles have many market players fretting about the possibility Mister Softee will prove to be the proverbial first tech-leadership shoe to drop, rather than the last.

"Microsoft is down for specific reasons, but if there's any kind of hiccup in any of these big companies, they're going to kill these stocks," said Timothy Heekin, director of equity trading at Thomas Weisel Partners in San Francisco. "It's going to be brutal."

Heekin isn't forecasting any particular shortfall, but sought to illustrate the dilemma facing many investors these days -- professional and otherwise. When it became apparent the riskier tech names were falling decidedly out of favor, most chose not to exit the sector altogether. Instead, they fled to the perceived safety and liquidity of blue-chip tech names such as Sun and Cisco.

Todd Gold, technical strategist at Gruntal, unwittingly described the conundrum. On the one hand, Gruntal is currently recommending that investors who feel the need to buy focus exclusively on the largest, top-quality names in the Nasdaq 100.

On the other hand, many are "trading at ridiculously high valuations," the technician lamented. "That's the danger."

McManus described the flight-to-quality within tech as a "circling the wagons" strategy.

Now, the concern is what happens when (if) the wagons start burning and the cavalry hasn't yet arrived. Or if some less brave investors decide not to stick around and find out.
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 .

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