A late rally helped the Nasdaq recover from an early 160-point deficit to close at 3877.61, down 24.08. The loss extended yesterday's 229-point beating, a 5.6 percent decline that marked the eighth-largest one-day plunge in the history of the index.
The Dow, which is less heavily weighted with tech stocks, moved in the opposite direction, gaining 124.72, or 1.1 percent, to close at 11,122.65.
"The Nasdaq has outshined the Dow on the strength of tech and Internet issues," said Peter Coolidge, managing director of equity trading at Brean Murray in New York. "Some of these stocks went straight up on a rocket, and it would make sense that the ones that went up the quickest would see the biggest declines, at least in the short term."
Investors who made large gains in the markets last year are capturing profits now in order to defer taxes until April 15, 2001, said Bryan Piskorowski, market analyst for Prudential Securities.
"First and foremost, the market was up 39 percent in December and that, in its own right, was too much too soon. That made us vulnerable to a shakeout," Piskorowski said.
In addition, a series of economic reports will soon be released that may prompt an interest rate hike next month. The first test comes Friday, when employment data is released, Piskorowski said. That will be followed with the Producer Price Index on Jan. 13 and the Consumer Price Index the following day.
The Federal Reserve is set to debate the course of interest rates when it meets on Feb. 1 and 2.
The Fed controls the directions of short-term interest rates; longer-term rates have already been rising. The yield on 30-year bonds hit 6.60 today, its highest level in 28 months. On Dec. 10 the yield was 6.16 percent.
"There is always a discounting nature in the markets and the bonds have already priced in a potential rate hike by the Fed. They're bracing for the worst," he said.
As investors pulled their money out of the tech-heavy Nasdaq in recent days, they have moved it to medium-sized companies and value stocks, said Phil Dow, director of equity strategy for Dain Rauscher Wessels.
"We've seen the mid-caps broaden out. Family Dollar Stores and Aptargroup go up three points in the past few days. These were stocks that no one cared about two or three weeks ago," Dow said. "And we've seen some value stocks like Williams Companies go up 4 points from its low."
Among tech stocks, Amazon.com shares fell 12.19 to close at 69.75 after the online retail giant said its sales for the fourth quarter of 1999 exceeded the total sales for 1998 but that the higher sales are not expected to cut the company's losses for the quarter.
Amazon also said it will incur higher-than-expected inventory-related charges and write-downs, in large part because it carried deep inventory in its newly started toys and electronics stores.
BMC Software also tanked, falling 27.44 to 49.56. The company warned that fiscal third-quarter profit will be below forecasts because of poor performance in North America.
Qualcomm dropped 5.63 to close at 156.44; Oracle shed 5.69 to close at 102.
Net2Phone rose 3.88 to 54.94 after the Internet phone company said it will join Panasonic Consumer Electronics in producing Internet-based phones.