Tech shares dive in afternoon trading

Today's broad slide in tech shares was perhaps more disconcerting to investors because even a dose of good news failed to lift a cloud of pessimism. The Federal Reserve's policy-making committee left the federal funds rate, the interest that banks charge, at 6.5 percent.

In its statement, the Fed noted that overall demand in the economy has slowed down and that advances in productivity have also continued to "help contain costs and hold down underlying price pressures."

"What we have is a Fed that is not going to be tightening in the near future," said Greg Mount, a senior economist at BankOne.

Mount views the news as positive because the Fed announced in its statement that the U.S. economy is slowing down. "The Fed threw (the markets) a bone on this one," he said.

Yet the markets did not react favorably. After rising 70 points earlier, the Nasdaq fell 113.73, or 3 percent, to 3,455.17, it's lowest level since May. The Standard & Poor's 500 index dropped 9.87 to 1,426.36.

The Dow Jones industrial average rose 19.61 to close at 10,719.74 led by Alcoa, which gained $2.44 to $26.94.

Brian Rauscher, an investment strategist at Morgan Stanley, believes that investors were hoping for a sign that the Fed would rule out future increases. However, in a release explaining its stance, the Fed noted that it remains biased toward raising rates in the future if a tight labor market and high energy prices pose a "risk of increasing inflation expectations."

The bottom line is that steady rates in the near term are not enough to erase concerns about third-quarter profits.

"The Nasdaq is looking for some positive news, and I think what it's going to take is a few companies coming out with strong earnings," said Rauscher.

Recent earnings warnings from high-profile companies such as Intel and Apple Computer have shaken investor confidence and sapped some of the enthusiasm surrounding the tech sector as investors prepare for third-quarter earnings season.

"The market has gone sideways for the past five months...and this isn't necessarily a bad thing," he said. Rauscher said the downturn is a way to squeeze out skittish investors and set the stage for some gains. "The market hasn't really cleaned everybody out yet."

At the end of regular trading, Intel gained 19 cents to $40.31. A new report said worldwide semiconductor sales grew 53 percent and hit an industry high for the month of August, helped by strong demand for Internet and wireless equipment.

Cisco Systems also gained 63 cents to $56.13. Cisco said it is spending about $100 million on its new Salem, N.H., plant that makes gear for fiber-optic networks. The 674,000-square-foot facility more than doubles company-owned manufacturing space worldwide.

The news was not so good for other large-cap stocks. Microsoft dropped $2.56 to $56.56; Oracle fell $9.50 to $69.25; and JDS Uniphase lost $2.31 to $87.63.

Oracle fell after the database software maker said sales of its flagship product would pick up next year, later than some analysts had expected.

The CNET tech index lost 64.63 to close at 2,749.96. Losers soundly beat out winners, with 73 of the 97 stocks in the index falling, 21 rising and three remaining unchanged.

All of the 18 sectors tracked by CNET Investor posted losses. Server software makers led the dive, losing nearly 9 percent, followed by PC software companies, which lost 5 percent. Internet content companies were the day's smallest losers, falling 0.67 percent.

Among members of the CNET tech index, Apple fell $1.93 to $22.31 and set a new 52-week low of $22.19 compared with a high of $75.18.

Xerox shares fell $3.94, or nearly 26 percent, to $11.38, after the copier company said yesterday it will have a third-quarter loss because of slow September sales and unfavorable currency exchange rates.

The Philadelphia semiconductor index fell 20.42, or about 3 percent, to 812.95, led by chip equipment maker Applied Materials, which lost $5.06 to close at $51.63.