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Tech Industry

Market ready to rebound? Not necessarily

    When will it be over?



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    Technology investors will spend the weekend asking that question after the Nasdaq went from shaky declines to outright slaughter Friday. The tech-heavy market has lost 27 percent of its value over the last five sessions, culminating in a rout Friday afternoon as the Nasdaq Composite Index shed more than 200 points to end at 3,321.29, its lowest level in nearly five months.

    Damage wasn't limited to one sector. The blue chip Dow Jones Industrial Average saw its worst one-day point loss ever as it staggered to a close of 10,305.77, down 617 points for the session. The broader S&P 500 dropped 83.95 to 1,356.56.

    Technical analysts see more room for stocks to fall, especially in the tech sector.

    "From an Elliott Wave perspective, I can count an important and lasting top in place for the big board averages," said Steve Porter, North American equity and stock index analyst at Elliott Wave International. "I have to realistically say that the damage we are seeing now is too much damage to come back from."

    According to Porter's trading band parameters, a meaningful top was six or seven months overdue. A top is signalled when the market gets 6 or 7 percent above the bands and relative strength on a weekly or monthly basis is above 80 percent.

    Market economists are pessimistic.

    "The loathing and trepidation has gone very rapidly from zero to 110 percent," said Scott Bleier, chief investment strategist at Prime Charter Ltd.

    Short investors -- who make money on declining stocks by borrowing shares, selling them immediately and then repurchasing them at a lower price -- see reality kicking in.

    "It's no longer an issue of a brief decline followed immediately by a recovery or even new higher levels," fund manager Paul McIntire told TheStreet.com's Herb Greenberg. "This is particularly true in companies we would say are highfliers, such as Internet companies and software companies."

    McIntire's BearGuard fund concentrates solely on shorting opportunities.

    In other words, whether you're depressed or ecstatic to see the market coming down from high double-digit and triple-digit price-to-earnings or price-to-sales ratios, be prepared for more.

    Consider that even after the recent plunge, the Nasdaq remains more than 600 points above its value from a year ago. Well-known technology names still trade at levels undreamt of under traditional valuation methods.

    Yahoo! (Nasdaq: YHOO) closed the week with a P-E of 527. Cisco Systems (Nasdaq: CSCO) sits at 158. Oracle (Nasdaq: ORCL) stands at 99. Even Microsoft (Nasdaq: MSFT), weighed down with antitrust fears, trades at nearly 50 times earnings.

    Analysts have been hoping that positive earnings reports would solidify the market. So far they haven't.

    Sun Microsystems (Nasdaq: SUNW) reported stellar earnings on Thursday before dropping 1 1/4 to 76 1/2 on Friday.

    Advanced Micro Devices (NYSE: AMD) on Wednesday reported earnings far ahead of the consensus forecast and predicted more to come. Yet the stock fell 13 percent over the last two sessions.

    Gateway (NYSE: GTW) on Friday met first quarter estimates and exuded enough positive feeling to elicit at least one brokerage upgrade. Shares actually gained for much of Friday before retreating in the overall market slide and ending down 1/2 to 51 1/2.

    Next week sees perhaps the best earnings hope for stemming the tide, as giants Intel (Nasdaq: INTC), IBM (NYSE: IBM) and Microsoft are scheduled to report quarterly results.

    The slightest hint of weakness will crush a stock. Emulex (Nasdaq: EMLX) plunged Friday despite easily beating analyst forecasts. Some observers suggested that disappointing sequential sales growth may have convinced Emulex investors to bail, but the trend was exacerbated by the overall sector's negative sentiment.

    "Obviously a large part of this is the market," said analyst William Lewis, of Chase H&Q. "A lot of high valuation stocks are coming down, especially those that have had steep runs."

    And if you're one of the few people still anticipating IPOsor secondary offerings, you might be waiting awhile.

    Many observers believe the market may have to wait for a clearer interest rate picture before moving up again. The Consumer Price Index figures released Friday morning showed far higher retail price growth than economists expected. That revived inflation fears and served as the catalyst for Friday's retreat.

    "This is bad news," said Pierre Ellis, senior economist at Primark Decision Economics. "This increases the likelihood the Fed will raise interest rates by 50 basis points rather than 25 basis points."

    And how do the companies themselves view the recent stock slide? A couple of executives at young Internet companies told Inter@ctive Investor they're not worried about an increased challenge.

    "It doesn't mean early stage companies won't be successful," said John Payne, CEO of Stamps.com (Nasdaq: STMP). "But it's going to be a lot harder."

    The B2B sector -- already hard hit this week after incubator Safeguard Scientifics (Nasdaq: SFE) said it would halt new investments in online business-to-business enablers -- still presents plenty of opportunity, said Mark Walsh, CEO of VerticalNet (Nasdaq: VERT). "What the (stock) market's doing has nothing to do with my confidence in the B2B market," he said. "At some point the market will show a real appreciation for real quality companies, and at some point all Internet companies will have to be profitable."

    -- Reuters and Larry Dignan contributed to this report.>