Sell-Off in Tech Shares Pulls the Market Down

NEW YORK —  A heavy sell-off in technology shares dragged the rest of the stock market lower Wednesday amid fears that, with technology flagging, there may be nothing else to lead the market forward.

The Nasdaq composite index plunged 2.8% to 2,248.91, led lower by Dell Computer, off $7.19 to $81.56 in the wake of its report of slower sales growth. The stock of the big computer maker has lost 20% in the last three days.

Hewlett-Packard, also reporting slower sales growth Tuesday, fell $2.38 to $68.13. Microsoft sank $6.25 to $150.

The Dow Jones industrial average held up for much of the day but was hit near the close, finishing down 101.56 points, or 1.1%, at 9,195.47. Similarly, the Standard & Poor’s 500 index faded at the end of the day to close off 1.4% at 1,224.03.

The tech-heavy Nasdaq composite index has fallen 10.4% from its Feb. 1 peak, which some analysts consider a troubling sign for the broader market.

“It’s similar to the second quarter of last year when the techs failed and then the S&P; gave up the ghost,” said Arthur Micheletti, investment strategist for Bailard Biehl & Kaiser in San Mateo, Calif.

In other markets, yields eased a bit in the Treasury bond market, while a key commodity price index hit another 23-year low.

The dollar fell against the euro for the first time in three days after the European Central Bank said interest rates are already low enough to stimulate growth, squelching speculation that it might cut rates. The dollar maintained its recent gains against the Japanese yen, rising past 119 yen.

In the stock market, the discouraging signs went beyond the dips in the major indexes and the sell-off among major tech names.

Losing shares swamped winners by a 29-12 ratio on Nasdaq. And the Russell 2,000 small-stock index fell to a two-month low, causing more pain for investors in that beleaguered sector.

Trading volume, however, was nowhere near a record. One stock watcher saw that as an indication that the market will remain unsettled for some time.

John Hughes, analyst at Shields & Co., said it is hard to be confident that a correction has run its course until there is a convincing “clean-out” in which stocks drop sharply in heavy trading.

Until that happens, Hughes said, “the best thing to do is not do a lot.”

The market is showing a “belated recognition” that long-term interest rates have been rising steadily since the Federal Reserve’s surprise cut in short-term rates in October, said Christine Callies, investment strategist at Credit Suisse First Boston.

The yield on the benchmark 30-year Treasury bond reached a six-month high of 5.42% last Friday before easing back to 5.31% in the past two days of trading.

On Oct. 5, with the stock market struggling and the Fed easing rates, the T-bond yield dropped to a low of 4.72%.

Rising rates are always a stumbling block for the stock market, Callies noted. She also said it is hard to identify a sector that can take the place of technology in leading the market up.

“For the moment, it’s easier to see what areas need to be trimmed than what to put more money into,” Callies said.

Other major tech names sliding on Wednesday included Sun Microsystems, down $6.38 to $94.06; Seagate, off $3.38 to $30.38; and Cisco Systems, down $3.94 to $95.13

In the Internet sector, Inktomi fell $4.13 to $56.50, America Online slid $6.50 to $153, Network Solutions tumbled $17.63 to $140, Broadcom fell $12.88 to $116.50 and Yahoo eased $3.75 to $129.63.

Bailard Biehl’s Micheletti said bonds are now a better bet than stocks. “Our view is that this [stock] market is so overvalued that at some point, it’s going to roll over and get really ugly,” he said.

If stocks were to hit a real slump, that would batter consumer confidence and probably lead to an economic slowdown, which in turn would only improve the relative performance of bonds, Micheletti said.

More optimistic on equities was Charles Lemonides, managing director of Sterling Advisors.

“The big, macro factors are still in place for the rally to continue: Inflation and interest rates are low, U.S. competitiveness is as strong as ever, and there is still a steady flow of money into the market,” he said.

Lemonides believes the decline in technology shares is just part of an expected--and healthy--rotation from a sector that became overvalued into others that have under-performed.

“The question is what groups will lead--not whether the market will go up or not,” Lemonides said.

His candidates to take over leadership: financial stocks, auto makers and other cyclical industrial stocks.

Banks and other financial stocks advanced Wednesday, as did utility companies. The modest rally in the bond market may have given investors a burst of optimism about those sectors, which benefit from falling interest rates.

Market Roundup, C7