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Tech Selloff Sends Stocks Into a Tumble : Markets: More companies warn of disappointing earnings. Nasdaq composite falls 27.30 points and Dow loses 42.99.

October 10, 1995|TOM PETRUNO | TIMES STAFF WRITER

The U.S. stock market tumbled Monday amid frenzied selling of technology shares, as the list of companies warning of disappointing third-quarter earnings seemed to lengthen by the hour.

The Nasdaq composite index of mostly smaller stocks, heavy with technology issues, plunged 27.30 points, or 2.7%, to 984.74 in a decline that many analysts believe signals the start of a significant market pullback, or "correction," after this year's phenomenal rally.

The blue-chip Dow industrial average also slumped, losing 42.99 points, or 0.9%, to 4,726.22, though it recovered from a decline of nearly 60 points early in the day.

"The selling is clearly spreading," said Michael Murphy, editor of the California Technology Stock Letter in Half Moon Bay.

He noted that after the market closed, investors were served with more bearish news: The Semiconductor Industry Assn. reported that new orders for computer chips dipped slightly in September, and technology bellwether Motorola issued a cautious outlook on earnings.

For weeks some market veterans have been warning that stocks' huge run-up in the first nine months of the year left them vulnerable to any bad news.

Now, as an increasing number of companies are admitting that their earnings growth is decelerating because of the slowed world economy, nervous investors are using those announcements as an excuse to sell stocks and lock in gains.

"A lot of people piled in just because stocks were going up," said Michael Metz, investment strategist at Oppenheimer & Co. in New York. "Now that the market is turning they all want out at the same time."

And technology shares, which had been gripped by a virtual mania this year as Wall Street projected spectacular growth for the industry, are leading the selloff, just as they had led the market higher.

"The expectation level had been set very high" for tech firms, noted Bruce Lupatkin, analyst at brokerage Hambrecht & Quist in San Francisco.

Monday's selloff was triggered by late-Friday announcements from several well-known tech companies--including Novell, BMC Software and Scientific Atlanta--that third-quarter earnings would be below analysts' expectations.

Most of the companies blamed slower sales, at least in part. Lupatkin said Europe's economy has apparently been weaker than expected and that U.S. companies' pace of spending to upgrade computer and telecommunications systems also appears to be slipping.

In addition, Microsoft's new Windows 95 operating system for personal computers, introduced in August with much fanfare, is believed to be selling more slowly than expected.

As disappointed investors rushed for the exits Monday, Novell shares plunged 2 3/4 to 14 5/8, BMC Software tumbled 8 3/4 to 34 1/2 and Scientific Atlanta slumped 3 to 12 5/8.

The Hambrecht & Quist technology stock index, which tracks about 200 issues, sank 3.7% for the day after dropping 1.3% on Friday.

Even worse for the technology sector, Motorola, which reported third-quarter earnings after the market closed, said that although its results were a record--up 25% from a year ago--it expects "to continue to experience the effects of slower [U.S.] economic expansion in selected businesses."

Shares of Motorola, a major producer of semiconductors and cellular phones, added 1/4 to 69 during regular trading on the New York Stock Exchange, but they were off 3 1/2 in after-hours trading.

Analysts say Motorola's warning and the semiconductor industry's report that its book-to-bill (orders vs. shipments) ratio fell to 1.11 in September from 1.14 in August are almost certain to spur fresh selling of tech shares today.

"The stocks are going down," Lupatkin conceded. "I don't think we're through this correction."

Indeed, one large group of investors--bank trust departments--were out of the market Monday because many banks were closed in observance of Columbus Day.

That kept trading volume on the NYSE relatively light at 275 million shares. But one sign of the widespread desire to take profits was that losers swamped winners by 16 to 6 on the NYSE and by 25 to 10 on Nasdaq.

To the further aggravation of many Nasdaq investors, a computer failure caused a one-hour shutdown of that market's automated trading systems early Monday.

Still, many traders said Monday's selling was fairly orderly, and did not smack of panic.

Although tech stocks were hit hard, blue chip shares fared better. The Standard & Poor's 500 index eased just 4.12 points, or 0.7%, to 578.37. The Russell 2,000 index of smaller stocks fell much less than the Nasdaq index, losing 1.7%.

The question on most investors' minds is how far stock prices can fall before buyers return in droves.

In a typical "correction" in a bull market, indexes such as the Dow and the Nasdaq composite could be expected to drop 10% to 15% from their peaks before stabilizing.

The Nasdaq index is already down 7.7% from its record high of 1,067.40 reached in September. The Dow, however, has lost just 1.6% from its record 4,801.80.

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