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Nasdaq drop brings market back to basics

Monday's 348-point drop was the biggest one-day point loss ever for the Nasdaq.

Only four times has the tech-heavy index ever lost more in percentage terms during a single session. In the last six trading days, the Nasdaq has yielded nearly 15 percent. It now sits at its lowest level in two months.

But it doesn't necessarily signal more trouble ahead for everyone, say analysts and fund managers.

"The question is, 'Are tech stocks finally getting taken down to shake out the speculators?' which is what I'm hoping," said William Schaff, chief investment officer for the Berger Information Technology Fund. "My sense right now is that there is some shaking out."

Much of the Nasdaq's gains this year have been attributed to traders looking for quick gains on hot stocks. That dynamic was bound to end, analysts said.

The Nasdaq declines over the last few sessions has especially hurt individuals who borrowed on margin to buy stocks, said Scott Bleier, chief economist at Primark Decision Economics. As stocks plunged, brokerage firms forced margin buyers to redeem their debts, which forced them to sell stocks to come up with cash, which in turn excerbates market declines.

"The margin speculator has been smashed," Bleier told Reuters. "The plunge in the Nasdaq is exactly commensurate with the momentum run-up we saw earlier this year."

Hot "New Economy" stocks of companies in sectors such as business-to-business e-commerce and communications chips tumbled today as rapidly as they rose in the past. Leading B2B players Ariba (Nasdaq: ARBA) and Commerce One (Nasdaq: CMRC) lost 15 percent and 21 percent respectively. Programmable logic device makers Actel (Nasdaq: ACTL) and Altera (Nasdaq: ALTR) gave up 23 percent and 8 percent.

Steep and sudden market reversals also exacerbate the effects of bad news. Witness Microsoft (Nasdaq: MSFT).

The software giant jumpstarted today's selloff as shareholders bailed after the collapse of antitrust settlement talks over the weekend. Antitrust fears also bit leading optical networking equipment makers JDS Uniphase (Nasdaq: JDSU) and E-Tek Dynamics (Nasdaq: ETEK); their merger is getting more scrutiny from regulators.

Earnings shortfalls are especially painful during market routs. Legato Systems (Nasdaq: LGTO) and Parametric Technology (Nasdaq: PMTC) took heavy hits today after issuing profit warnings.

"If you disappoint on the numbers, you're dead," Schaff said. "You'd better at least match expectations."

Fleeing to the Old Economy

Traditional blue chips also fell during much of the Nasdaq's recent decline over the last few sessions, but the Old Economy benefited on Monday, when the 30-stock Dow Jones Industrial Average gained 2.75 percent largely on the strength of financial services stocks. The broad-based S&P 500 rose 1.2 percent over the last two sessions.

"It's nice to get caught up in the hype of the technology of the day ... But at the end of the day, it (the stock market) is about investing, not venture companies."

How much of a shift was there Monday? General Electric (NYSE: GE), the dean of blue chip stocks, regained its status as the most valuable publicly-traded company in the world.

GE's market cap at the close of regular trading Monday stood at $530.5 billion. Cisco Systems (Nasdaq: CSCO), which enjoyed a brief reign at the top, was valued at $506 billion. Microsoft (Nasdaq: MSFT) stood at $473 billion.

Schaff likes "old, boring" stocks even within the tech sector itself. His picks include more traditional tech companies such as Automatic Data Processing (NYSE: AUD), a maker of human resources and payroll software among other things, and First Data (NYSE: FDC), one of the leaders in electronic transaction systems.

Recent declines could present the best buying opportunity for tech stocks in months. "We are getting very close to the flush-out in Nasdaq," Bleier said. "If it is not today, it will probably be this week."

Should the Nasdaq continue dropping, much of the volatility and big swings that have characterized the market over the last couple of years could slow down. "If it gets really bad, it will shake out a lot of people, and then the volatility will be gone because you have fewer people," Schaff said.>