Biotech Sell-Off Ignites Rout of Tech Stocks

A vicious morning sell-off in biotechnology stocks spilled over to other tech sectors Tuesday and raised fears that Nasdaq is barreling into a “correction” only days after closing above 5,000.

The Nasdaq composite index sank 200.61 points, or 4.1%, to 4,706.63 as investors dumped stocks ranging from chip makers to networkers. The biotech sector sustained the deepest damage after remarks by President Clinton raised concerns about whether human genomics companies will be able to fully profit from their research.

The damage was less severe for the broad market. The blue-chip Standard & Poor’s 500 index sank 1.8%. The Dow Jones industrial average lost 135.89 points, or 1.4%, to 9,811.24.

Wall Street’s slump triggered fresh selling early today in Asia, where a plunge in Japanese Internet stocks on Monday had been blamed for raising jitters about tech stocks worldwide.

Japan’s Nikkei-225 index was off 0.9% at midday today, and Taiwan’s key index was down 2.2%.

On Tuesday the Nasdaq biotech index tumbled 12.5%, leaving it down more than 28% in six days after an almost uninterrupted climb since late December.

Investors trampled over themselves to dump biotech shares, and some posted record trading volumes. Nasdaq volume overall was just under 2 billion shares.

Some analysts saw the biotech slide as a precursor to a painful drop in other highflying sectors if the market’s sudden momentum shift accelerates.

“Maybe it’s just profit-taking, but the problem with pricking a balloon is it can get pretty wild if you let too much air out,” said Jim Paulsen, chief investment officer of Wells Capital Management.

Nasdaq, which by Friday was up 24% year-to-date, has fallen 6.8% in two days. That’s a stark contrast to the ebullient mood last week when Nasdaq bounded to its first close above 5,000 on Thursday.

After opening 90 points higher Tuesday, Nasdaq fell steadily through the day as the nervousness engulfing biotechs poisoned other areas of tech. Intel, for example, was up $3.50 in the morning before heavy selling in the final hour left it down $4.25 to close at $117.88.

Some biotech experts said the sell-off was overdone. Nevertheless, the violent decline showed how quickly a group of stocks can fall when “momentum” investors pile out.

“Biotechs got crushed and obviously it makes people think about preserving their profits in some of the other highflying areas,” said Brian Belski, chief investment strategist at George K. Baum & Co.

Tuesday’s sell-off came as the New York Stock Exchange said so-called margin borrowing to buy stocks climbed 8.9% in February to $265.2 billion. Margin debt is up a 45.5% since the end of October, according to the Liquidity Trim Tabs newsletter.

Buying stocks on credit sharply boosts profits in up markets, but also magnifies losses in down markets. If borrowers rush to sell stocks as they fall, the market’s decline can accelerate rapidly.

In any case, in the last few days many traders have complained that tech stocks are “extended” and not worth the risk of buying. Instead, sellers appear to be increasingly targeting tech stocks that have notched big gains and are ripe for profit-taking.

For example, Ciena, a maker of optical-networking equipment, topped at $189 a week and a half ago, but has since tumbled to $134, Belski pointed out. Nevertheless, it’s still up 133% for the year.

The tech sell-off surprised few people on Wall Street given the dramatic gains this year, and experts said it’s part of the volatility that appears virtually built into Nasdaq these days. In January alone, Nasdaq underwent two sharp, though short-lived, pullbacks. A “correction” is considered a drop of 10% to 20%.

In a bit of good news for the market, software giant Oracle reported after the close of trading that its quarterly operating profit was 17 cents a share, beating Wall Street’s 13-cent projection and matching so-called whisper numbers. Its shares slid $1.75 to $77 in regular trading. But the stock rose to $83.75 in after-hours trading.

Also, the Russell 2,000 small-stock index fared better than Nasdaq, losing 2.9% compared with Nasdaq’s 4.1% drop.

* LOSING LUSTER?: Some fund managers are looking to cut tech and telecom investments. C4

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Nasdaq Pulls Back

From its record closing high reached Friday, the Nasdaq composite index has tumbled 6.8%. Sharp, short-lived pullbacks have been common in the tech-dominated index over the last year. The largest such pullbacks since last April, measured using the index’s daily closes:

*

Dates / Percentage decline

Friday to Tuesday: --6.8%

1/21/00 to 1/28/00: --8.2

1/03/00 to 1/06/00: --9.8

10/11/99 to 10/19/99: --7.8

7/16/99 to 8/10/00: --13.1

4/26/99 to 5/25/99: --10.2

Source: Times research