Silver lining to Wall Street's wildest day

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The Independent Online

While Wall Street's most volatile session in history left traders reeling, market analysts were holding out hope that the purge of the swollen technology sector had restored a sense of balance to the market.

Fueled by an exodus from all things technological, the stock market went into a stomach-churning rout Tuesday, with the Nasdaq composite index and Dow Jones industrials each dropping more than 500 points. But the stampede reversed as buyers returned in search of bargains, and most stocks ended the chaotic session with only moderate losses.

Many of the best-known technology stocks are still up for the year, but out of the stratospheric territory that had distressed investment analysts. Smaller companies with little or no earnings have been knocked down to prices that are more justifiable to investors still eager to take chances.

What's more, when the market stopped swooning, the Nasdaq and the Dow had obliterated much of the divergence that had perplexed market analysts since late last year.

At the close of trading, the Nasdaq was up just 2 percent in the year to date. The Dow was down less than 3 percent for the year. At the height of the market's divergence in early March, the Nasdaq had risen 24 percent for the year and the Dow had sunk nearly 15 percent.

"As hard as it is to believe, this is a good thing," said Pete Anderson, chief investment officer at American Express Financial Advisors in Minneapolis. "One sector of the market was insanely overvalued. The rest was deeply undervalued. Now we are reversing that."

The Nasdaq and the Dow each recorded their widest point swings in history Tuesday on record volume. The Nasdaq was down 574.57 points at midday, then clawed back to finish down 74.79 at 4,148.89. From its high to its low, the Nasdaq moved more than 634 points.

The Dow rose 196.31 points Tuesdayy afternoon. It finished down 57.09 at 11,164.84, having made its way back to positive territory briefly before turning lower once again. It swung more than 700 points during the day.

The swoon contributed to a second straight decline in Japan's benchmark 225-issue Nikkei Stock Average. In selling led by technology shares, the Nikkei shed 213.36 points, or 1.04 percent, to 20,381.57 at the end of the morning session. On Tuesday, the average closed down 132.96 points, or 0.64 percent.

"The simple, rational thing to say is that that the technology sector is coming back to Earth," said Hugh Johnson, chief investment officer at First Albany Corp. "We've gone through a period of dramatic speculation, and historically, every period of speculation has been followed by a period of distress."

Among the factors in Tuesday's selling were what's known in the market as margin calls. When investors buy stock using borrowed money, known as margin, they are forced to sell if prices drop sharply.

"That substantially exaggerated the downturn," said Tom Galvin, chief equity strategist at Donaldson, Lufkin and Jenrette in New York.

On the floor of the New York Stock Exchange, sell orders stacked up at trading posts and drove traders outside the building in search of a brief respite.

"I was so busy, honest to God, I didn't know how bad we were down," said Terrence O'Donnell, trading clerk with Salomon Smith Barney. "I was literally buried in paper."

Analysts said the swiftness of the selloff evoked memories of October 1997, when the Dow fell 554 points in a single session as financial crises in Asia and Russia gripped world markets. But market watchers noted one crucial, though perplexing, difference.

"We haven't seen a bout of panic selling like today's since then, but there was a clear catalyst then, and there isn't one now," Galvin said.

In Austin, Texas, investor Michael Miglini made no secret of his distress.

"I lost more money in this week than I made in the previous two years," said Miglini, 31, who recently sold his construction company and invested in the stock market. Most of his holdings are in technology stocks.

"It was the absolute worst timing possible," he said. "It's a painful lesson."

For some, however, the pain was short-lived. Computer programs that triggered selling on the way down eventually sparked buying. Investors resumed their recent shift to blue-chip stocks, which are seen as more stable and less speculative than their high-tech counterparts.

Dow components Procter and Gamble and Merck rose Tuesday.

The largest of the technology stocks recovered, too. Computer network maker Cisco Systems ended with a slight increase. Analysts pointed out that even with the wide swings of many stocks, investors in most technology names are still posting dramatic gains for the year.

Investors also found refuge in the bond market. Prices soared, bringing the yield on the 30-year Treasury bond down to 5.77 percent from 5.81 percent late Monday.

By the end of the session, Wall Street analysts were looking cautiously to a handful of factors that could halt the decline of technology stocks and lift the market anew. Corporate earnings reports, which will flood the market in the next few weeks, are expected to be strong.

Also, some market watchers said the market's implosion may convince the Federal Reserve that it won't need to intervene further to slow the economy.

"If the market does the Fed's job, and forces a slowdown, I think the Fed could take their feet off the brakes," First Albany's Johnson said.