Tech stocks a love
affair gone sour

The Nasdaq has given back 47%, or
334 points, of its gain since its Sept. 23 low

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By Lisa Singhania
Associated Press

NEW YORK >> Wall Street's quick rebound from the precipitous losses that followed Sept. 11 prompted predictions that the market's worst days were over, particularly in the beleaguered tech sector. Yet, nearly six months later, the Nasdaq composite index has fallen to its levels of late October and investors are despairing.

"Investors have fallen completely out of love with technology," said Larry Wachtel, market analyst at Prudential Securities. "This is a cautious market that's defensive in nature. People are just not trusting of the strength of the economic recovery and the accounting issues are making things worse."

Those doubts have had a particularly dramatic effect on technology stocks.

After soaring a spectacular 636 points between Sept. 23 and Jan. 4, the Nasdaq, which reflects the performance of the tech sector, has backtracked, shedding 334 points, or 47 percent, of that advance in less than two months. This past week alone, the index fell 4.5 percent.

The decline has been part of a broader market pullback as investors set aside their hopes of a vigorous economic recovery and reconciled themselves to the reality that profits will improve gradually and modestly at best.

Blue chips have fallen, too, pulling down the Standard & Poor's 500 index and Dow Jones industrial average in low-volume sessions that suggest many investors are just staying away. But blue-chip selling has been more muted -- the Dow advanced 0.7 percent for the week, while the S&P 500 lost 1.3 percent.

Analysts say the tech sector's disproportionate pain reflects the fact it advanced faster and further than the broader market, and therefore has further to fall as the market rights itself.

The selling has intensified, however, in the aftermath of the Enron scandal.

Amid the increasing questions about the accuracy of earnings, investors have shunned companies whose business structure appears too labyrinthine.

Instead, investors are gravitating toward companies that seem easier to understand, such as Kellogg and Procter & Gamble -- both of which made new 52-week highs this past week.

"There's a general critical feeling about complexity right now, a thought that if you don't understand what a company does you had better bash it," said Tim Leach, chief investment officer for Wells Fargo's Private Client Services. "So people buy Procter & Gamble because they understand diapers, but when you get into hyperswitches and next-phase servers, it's something else and right now people are staying away."

Questions about some tech companies have added to investor anxiety. Computer Associates confirmed yesterday its books are being scrutinized by federal investigators. The software maker's stock has fallen from nearly $40 earlier this month to the $15 range. The previous week, IBM and Qwest made headlines because of doubts about their accounting practices.

And then there is the issue of earnings. One of the reasons for the tech sector's solid snapback was the expectation that, by early this year, corporations would have started to predict profitability. But that hasn't happened -- most companies remain cautious or have reduced their outlooks.

Ciena, for example, fell nearly 13 percent Thursday after the networking company cut its second-quarter revenue estimate about 40 percent below analysts' forecasts.

Analysts say relief for tech stocks might still be months away. Accounting concerns are also still a problem, with many investors not convinced that more companies won't reveal problems. And companies aren't expected to issue many earnings forecasts until they release second-quarter results in mid-April.

Even if earnings improve and accounting scandals start to dissipate, however, Wall Street is likely to remain cautious.

"That whole psychology of 1999 to the 2000 period is gone. People don't want to wait around too long in tech stocks. They make a profit and get out or just don't buy," Wachtel said. "The people who used to pay 100 times earnings for EMC, for example, won't pay 10 times earnings anymore."

For the week, the Dow rose 65.11, or 0.7 percent, to 9,968.15, after yesterday's gain of 133.47.

The Nasdaq registered a weekly loss of 80.66, or 4.5 percent, despite advancing 8.30 to 1,724.54 yesterday.

The S&P 500 slipped 14.34, or 1.3 percent, for the week, closing at 1,089.84 after rising 8.89 yesterday.

The Russell 2000 index, the barometer of smaller company stocks, finished the week down 4.18, or 0.9 percent, despite gaining 6.63 to 465.07 yesterday.

The Wilshire Associates Equity Index, which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues, ended the week at $10.179 trillion, down $136.18 billion from the previous week. A year ago the index was $11.500 trillion.