The U.S. stock market tumbled Monday amid frenzied selling of technology shares, as the list of companies warning of disappointing third-quarter earnings seemed to lengthen by the hour.
The Nasdaq composite index of mostly smaller stocks, heavy with technology issues, plunged 27.30 points, or 2.7%, to 984.74 in a decline that many analysts believe signals the start of a significant market pullback, or "correction," after this year's phenomenal rally.
The blue-chip Dow industrial average also slumped, losing 42.99 points, or 0.9%, to 4,726.22, though it recovered from a decline of nearly 60 points early in the day.
"The selling is clearly spreading," said Michael Murphy, editor of the California Technology Stock Letter in Half Moon Bay.
He noted that after the market closed, investors were served with more bearish news: The Semiconductor Industry Assn. reported that new orders for computer chips dipped slightly in September, and technology bellwether Motorola issued a cautious outlook on earnings.
For weeks some market veterans have been warning that stocks' huge run-up in the first nine months of the year left them vulnerable to any bad news.
Now, as an increasing number of companies are admitting that their earnings growth is decelerating because of the slowed world economy, nervous investors are using those announcements as an excuse to sell stocks and lock in gains.
"A lot of people piled in just because stocks were going up," said Michael Metz, investment strategist at Oppenheimer & Co. in New York. "Now that the market is turning they all want out at the same time."
And technology shares, which had been gripped by a virtual mania this year as Wall Street projected spectacular growth for the industry, are leading the selloff, just as they had led the market higher.
"The expectation level had been set very high" for tech firms, noted Bruce Lupatkin, analyst at brokerage Hambrecht & Quist in San Francisco.
Monday's selloff was triggered by late-Friday announcements from several well-known tech companies--including Novell, BMC Software and Scientific Atlanta--that third-quarter earnings would be below analysts' expectations.
Most of the companies blamed slower sales, at least in part. Lupatkin said Europe's economy has apparently been weaker than expected and that U.S. companies' pace of spending to upgrade computer and telecommunications systems also appears to be slipping.
In addition, Microsoft's new Windows 95 operating system for personal computers, introduced in August with much fanfare, is believed to be selling more slowly than expected.
As disappointed investors rushed for the exits Monday, Novell shares plunged 2 3/4 to 14 5/8, BMC Software tumbled 8 3/4 to 34 1/2 and Scientific Atlanta slumped 3 to 12 5/8.
The Hambrecht & Quist technology stock index, which tracks about 200 issues, sank 3.7% for the day after dropping 1.3% on Friday.
Even worse for the technology sector, Motorola, which reported third-quarter earnings after the market closed, said that although its results were a record--up 25% from a year ago--it expects "to continue to experience the effects of slower [U.S.] economic expansion in selected businesses."
Shares of Motorola, a major producer of semiconductors and cellular phones, added 1/4 to 69 during regular trading on the New York Stock Exchange, but they were off 3 1/2 in after-hours trading.
Analysts say Motorola's warning and the semiconductor industry's report that its book-to-bill (orders vs. shipments) ratio fell to 1.11 in September from 1.14 in August are almost certain to spur fresh selling of tech shares today.
"The stocks are going down," Lupatkin conceded. "I don't think we're through this correction."
Indeed, one large group of investors--bank trust departments--were out of the market Monday because many banks were closed in observance of Columbus Day.
That kept trading volume on the NYSE relatively light at 275 million shares. But one sign of the widespread desire to take profits was that losers swamped winners by 16 to 6 on the NYSE and by 25 to 10 on Nasdaq.
To the further aggravation of many Nasdaq investors, a computer failure caused a one-hour shutdown of that market's automated trading systems early Monday.
Still, many traders said Monday's selling was fairly orderly, and did not smack of panic.
Although tech stocks were hit hard, blue chip shares fared better. The Standard & Poor's 500 index eased just 4.12 points, or 0.7%, to 578.37. The Russell 2,000 index of smaller stocks fell much less than the Nasdaq index, losing 1.7%.
The question on most investors' minds is how far stock prices can fall before buyers return in droves.
In a typical "correction" in a bull market, indexes such as the Dow and the Nasdaq composite could be expected to drop 10% to 15% from their peaks before stabilizing.
The Nasdaq index is already down 7.7% from its record high of 1,067.40 reached in September. The Dow, however, has lost just 1.6% from its record 4,801.80.
Wall Street veterans note that one of the problems that could bedevil the market this time is the fact that so many investors--institutional and individual--jumped aboard the rally between January and September and still have hefty gains that they fear will disappear. That could fuel much more selling in the weeks ahead.
The Nasdaq index, for example, is still up 31% year-to-date.
"With the market up as dramatically as it is, traders are quick to unload but in no hurry to reload," said Alan Ackerman, strategist at Fahnestock & Co. in New York.
Some analysts are particularly concerned about the high level of ownership of tech shares in mutual funds, especially at giant Fidelity Investments. If individual investors heavily redeem fund shares, they could force portfolio managers to dump stock into a falling market. So far, however, there is no sign that fund investors are bailing out.
Murphy of the California Technology Stock Letter believes that after a further 10% to 15% decline in key tech shares, bargain hunters will emerge.
"1996 will be a good year for technology companies," Murphy predicted. He believes it's too late to sell and that most investors would be smarter to hold on to their stocks.
Among Monday's highlights:
* Tech losers included Intel, down 1 7/8 to 60 1/8; IBM, off 2 1/8 to 92; DSC Communications, down 5 1/8 to 39 1/4; America Online, off 3 1/4 to 60; and Nokia, down 3 to 63 1/8.
Also, EMC and Sequent Computer, respectively down 1/8 to 16 3/4 and 3/4 to 18 3/8, could plunge today. They issued downbeat earnings forecasts after the market closed.
* Technology wasn't the only industry hit by earnings concerns. Worries about paper companies' profits pounded many of those shares. International Paper dropped 1 3/8 to 37 5/8 and Boise Cascade sank 1 5/8 to 37 7/8.
* The day's winners were mostly large consumer growth companies and utilities, whose shares are regarded as refuges during times of turmoil. McDonald's added 1/4 to 39, Coca-Cola gained 7/8 to 71 5/8 and BellSouth jumped 3/4 to 74.
Market Roundup, D8
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Stock's Slide Accelerates
Stocks tumbled Monday led by the Nasdaq composite index, as technology shares were hit by a flurry of selling in the wake of disappointing corporate earnings reports. Many analysts believe the bull market is in the throes of a "correction" that could shave at least 15% off major stock indexes. Nasdaq composite's weekly closes, except latest:
Some of the technology stocks that suffered sharp declines Monday.
Stock Mon. close Pct. drop BMC Software $34.50 -20.2% Novell 14.63 -15.8 Parametric 54.75 -8.6 Cirrus Logic 46.75 -8.1 Microsoft 83.13 -3.2 Intel 60.13 -3.0 IBM 92.00 -2.3