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Tech Plunge Starting to Resemble '70s Bear Market


Another day, another technology-stock sell-off.

With the Nasdaq composite index sliding below 3,000 on Monday and no sign of a turnaround on the horizon, some market experts are beginning to fear that this year's tech plunge could be far lengthier and more agonizing than was thought possible even a few weeks ago.

Rather than the type of harrowing but brief pullback that has characterized tech sell-offs in recent years, the current tech drop is looking more like the prolonged bear market of 1973 and 1974, they say.

In those years--the worst bear market since the Great Depression--stock prices dropped slowly but steadily. Each rally raised hopes of a recovery. But as each rebound proved to be short-lived, investors' nerves were frayed a bit more, and the market finally bottomed out in late 1974 with Nasdaq down 60% and the Dow Jones industrial average off 45%.

The startling plunges in stocks such as Intel and Dell Computer are stirring memories of the carnage done in the past era to the so-called "Nifty Fifty" stocks--large growth stocks such as Xerox and Eastman Kodak once considered to be impervious to bad news. But as the '70s bear market worsened, they succumbed to brutal sell-offs that clipped some of their values by 80% or more.

"This feels very much like '73-'74, where we had the declines in the Nifty Fifty, and if there was a word that characterized each downward step it was 'denial,' " said Hugh Johnson, chief investment officer at First Albany Corp. "Everybody denied that it was a bear market, and everyone was forecasting a turn based on [lower] valuations."

Not everyone on Wall Street is so bearish. On the contrary, some market watchers are encouraged by the relatively strong performance in other sectors such as drugs, finance and so-called consumer noncyclical stocks such as beverage companies and restaurants.

They contend that while tech looks horrible, the outlook for the U.S. economy and the overall stock market is actually quite promising.

From March 27 through last Friday, tech stocks in the Standard & Poor's 500 index had shriveled by 39%, said Jim Paulsen of Wells Capital Management. But the S&P's nontech stocks had actually risen by 1.4% during that period.

Excluding tech and telecommunications stocks, said Peter Canelo, investment strategist at Morgan Stanley Dean Witter, the rest of the S&P 500 notched a new all-time high last Wednesday.

"The silver-lining story for the stock market is that the vast majority of stocks have been falling for three years, and if anything, we're closer to the end of a bear market than the beginning of a bear market, outside of tech," Paulsen said.

The bearish argument for techs rests on the premise that, despite Nasdaq being off 41% from its March high, the selling is showing no signs of lightening up. Ever since March, bulls have expected a recovery to be right around the corner. But despite brief rallies, sellers have continued to call the shots.

The continued deterioration in tech-stock prices is wreaking havoc with the psyches of small investors who have "bought the dips" this year only to get burned as prices kept receding.

Some market watchers say the selling could actually pick up steam in the next month as small investors dump their losing positions in a burst of tax-related selling.

"Is it the end of the road for the long-term [prospects for tech]? Probably not," said A.C. Moore, chief investment strategist for Dunvegan Associates Inc. in Santa Barbara. "Do we have some problems for the next several months? Yes."

There are several similarities between today's tech sell-off and the '73-'74 bear market, Johnson said. The heart-rending drops in some once-mighty tech giants recall the plunges in the can't-miss stocks of the early '70s. Like this year, the Fed was raising interest rates in the earlier period. And like now, growth in money supply and bank lending was slowing, he said.

Likening it to a baseball game, Thomas McManus, market strategist at Banc of America Securities, thinks the tech sell-off is in only the fifth or sixth inning. The first leg down came in March and April when techs sold off even though their fundamentals seemed solid. The second leg down is coming now as investors acknowledge a problem with a slowing economy and weakening earnings.

The last leg down should occur in the next few months as techs give in a final spasm of selling by frustrated investors, he said.

"The third leg of the bear market is the liquidity stage, where people sell without regard to the fact that the fundamentals aren't getting any worse, but prices are getting worse because people are selling," McManus said.

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