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Tech Stocks Lead Drop as Investor Angst Rises

July 22, 2004|Tom Petruno | Times Staff Writer

Stocks fell sharply Wednesday, once again led by technology issues, as earnings disappointments and other concerns pushed more nervous investors to the sidelines.

The tech-dominated Nasdaq composite index slumped 42.70 points, or 2.2%, to 1,874.37, its lowest close since Oct. 24. And that was before online auction giant EBay Inc. fueled more gloom with a second-half profit forecast that left Wall Street unimpressed.

After four weeks of mostly edging lower, the market on Wednesday had more of a tone of anxiety to it, some analysts said, with trading volume jumping to its highest level in nearly a month.

Selling was heaviest in tech shares and smaller stocks, but even blue chips had their worst day since at least May. The Dow Jones industrials fell 102.94 points, or 1%, to 10,046.13.

Losers swamped winners by more than 3 to 1 on the New York Stock Exchange and on Nasdaq.

The growing gloom left some market pros hopeful that key indexes were getting close to at least a near-term bottom. It's often the case that stocks stabilize or rise just as most investors begin to think the next move is certain to be down.

"I don't think the sell-off has a lot further to go," said Kevin Marder, chief strategist at Ladenburg Thalmann Asset Management in Los Angeles.

The Nasdaq index has plunged 8.5% since June 30. The Dow is off 3.7% in that period.

Earnings reports have received much of the blame for the poor start to the second half. On balance, the reports have been beating analysts' expectations. But many big-name companies' forecasts for the year have been less optimistic than what Wall Street had hoped to hear.

"Good news has become expected," said Brett Gallagher, head of U.S. equities at Bank Julius Baer in New York. If companies don't dazzle with their outlooks, let alone if they disappoint, investors feel as if there's no good reason to bid share prices higher, he said.

Tech stocks are bearing the brunt of the selling because the generally high price-to-earnings ratios of those issues make them feel too risky to hold as bullish sentiment deteriorates, analysts say.

"When you get a market like this, stock valuations suddenly matter," said Peter Boockvar, equity strategist at Miller, Tabak & Co. in New York.

At its peak share price of $92.81 in June, EBay stock had a price-to-earnings ratio of 78 based on analysts' average estimate of 2004 earnings per share. By contrast, the average blue-chip stock is priced at about 18 times this year's estimated earnings.

The sour view of the market is compounded by stubbornly high oil prices, fear of terrorist attacks at the upcoming U.S. political conventions and uncertainty over how high interest rates might go, experts say.

Testifying before Congress for a second day, Federal Reserve Chairman Alan Greenspan on Wednesday reiterated his view that the economy was in a "self-sustaining" expansion, which cemented some investors' expectations that the Fed would raise its benchmark short-term rate at the next policymaking meeting Aug. 10.

Last month the central bank lifted that rate from 1% to 1.25%, the first increase in four years.

One effect of Greenspan's comments was to push Treasury bond yields higher Wednesday. The two-year Treasury note jumped to 2.67% from 2.62% on Tuesday. The yield was as low as 2.50% last week.

The 10-year T-note rose as high as 4.51% before ending the day at 4.47%, up from 4.45% on Tuesday.

But if the economy continues to grow at a decent rate, market optimists say that would provide a solid underpinning for stocks -- which is why many don't believe prices are vulnerable to a steep plunge from current levels.

Ladenburg Thalmann's Marder thinks many investors are using earnings reports, oil and terrorism worries as "convenient excuses to take some money off the table" after stocks soared last year and then mostly treaded water in the first half.

He noted that the market was entering what has historically been its weakest months of the year -- August through October. That is added incentive for some investors to step to the sidelines this month, he said.

Analysts who watch stock chart patterns say the next few days could be key: Major market indexes are at or near levels that have marked "floors" for prices in other sell-offs this year.

The Nasdaq composite, for example, on Wednesday fell below its previous 2004 closing low of 1,876.64 reached on May 17.

The blue-chip Standard & Poor's 500 index, which dropped 14.79 points, or 1.3%, to 1,093.88 on Wednesday, now is below its 200-day moving average price.

If share prices make a stand at these levels, it could give bargain hunters more confidence to jump in, analysts say. On the other hand, a sharp drop from here could encourage more selling, they warn.

Among Wednesday's highlights:

* Smaller stocks, which on average performed better than blue chips in the first half, are leading the latest downturn. The Russell 2,000 small-stock index tumbled 15.62 points, or 2.8%, to 548.57, and is down 7.3% since June 30.

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