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Stocks take breathless roller-coaster ride

The longest-running bull market in history turns distinctly bearish as the Dow and Nasdaq indexes plunge sharply before clawing their way back.

The longest-running bull market in history turned distinctly bearish today as the Dow and Nasdaq indexes plunged sharply before clawing their way back.

The Nasdaq composite index plummeted a stunning 574 points in midday trading, its biggest percentage loss since 1987. The Dow Jones industrial average also dived, falling more than 500 points at the peak of the selling frenzy.

Almost as remarkable as the plunge was the recovery, as both indexes snapped back to post relatively minor losses.

"I can't think of anytime when the markets have been this wild," said Bill Meehan, chief market analyst at Cantor Fitzgerald. "In '87, it was one direction at least.

"The upside on today's action was quite remarkable," he added. "I suppose there were some people waiting on the side for a panic."

John Ryding, chief economist at Bear Sterns, described the early plunge as "a cleansing process that markets go through from time to time."

In this case, the cleaning briefly became a bath for many investors who were apparently spooked by several events: the ruling in the Microsoft antitrust trial, rising interest rates, and sky-high valuations for many tech shares. According to Bloomberg News, Nasdaq stocks trade for an average of 186 times profit, while companies in the Dow average trade for 26 times recent earnings.

The selling wave swamped the Dow, which had been largely immune from the Nasdaq turmoil of the past several weeks. The index of 30 stocks, which recently added Microsoft and Intel, posted an early gain, then reversed course and sank hundreds of points in mere minutes. At one point the Dow was down 504 points.

The Nasdaq ended the day down 74.79 at 4,148.89, while the Dow dipped 46.85 to 11,175.08. The CNET tech index lost 18.19 to close at 3,190.26, and the Standard & Poor's 500 index dipped 11.24 to close at 1,494.73.

At its lowest point today, the Nasdaq was down more than 25 percent from its March 10 record high. A decline of 10 percent is typically described as a correction, while a 20 percent drop is classified as a bear market. The Nasdaq is trading at approximately where it started the year, having erased a 24 percent gain in the past few weeks.

Volume records were set today on the New York Stock Exchange, with 1.5 billion shares traded, and on the Nasdaq, where 2.7 billion shares changed hands.

"When you have a sudden drop, the markets tend to recover rather quickly," said John Gipson, a manager of the Digital Future Fund, which holds about $3 million in assets. "It's when you have a long, grinding decline that the markets take a lot longer to recover...The bear markets of 1973 and 1974 took about 10 years to recover."

Bear markets are Additional comments frustrating for professional and amateur investors because "you never know when to get out," he added.

For the long term, "I don't think this is anything more than a correction in the technology sector," said John Ryding, chief economist at Bear Sterns. "What goes up sharply corrects sharply."

The Nasdaq gained 86 percent last year--its best performance ever and slightly better than the previous record holder, the Dow's run-up in 1915. Investor euphoria carried over into this year, as the Nasdaq continued to set record highs until early last month.

"We still have the building blocks in place that gave us this economy," Ryding said. "I don't think the fundamentals have changed.

"I don't think economic growth is an issue; we're still growing at around 4 percent. I don't see inflation as a risk, and I don't see corporate growth being impaired by the volatility in the financial markets," he added.

"Like anything else, the market overreacts," said Dan Gillespie, senior portfolio manager of Rydex Funds, which has $8.5 billion in assets. "I think the market overreacts on the upside and on the downside. (The run-up in) February was ridiculous."

Gillespie said the entire sector has been "spooked" by the recent Microsoft news, but he remains optimistic. "Microsoft is not going anywhere; it's still a blue chip stock."

Gillespie said some caution is warranted, however. "I think a lot of people are jumping into the technology sector blindly, especially with the Internet names, without knowing what they're buying," he said.

"Investors, especially the newer ones that have entered the markets recently, have been buying highly speculative small-cap tech stocks that they should be more wary of," he added. "I'm not saying that they should steer clear of the sector completely, but they should make an effort to diversify their portfolios."