Wall Street Nose-Dives, Then Rallies by Day’s End

NEW YORK —  In a day of spectacular whiplash on Wall Street, the stock market Tuesday took its most violent plunge in years amid panic selling but then rebounded in a stunning afternoon rally that erased most of the early losses.

The technology-heavy Nasdaq composite index, which tumbled 7.6% on Monday, plummeted another 13.6% in three hours of furious action Tuesday before the bounce-back began.

By contrast, on its worst full day ever the Nasdaq lost 11.4% in the Oct. 19, 1987, market crash. Though investors initially snapped up blue-chip shares on Tuesday as they fled Nasdaq, the technology debacle soon spread to the rest of the market, as trading volume reached unprecedented levels: A record 2.88 billion shares on Nasdaq, and 1.5 billion shares on the New York Stock Exchange.

The Dow Jones industrial average, which had gained 200 points early Tuesday at Nasdaq’s expense, sank 504 points by midday before rallying back to close down 57.09 points at 11,164.84.

Like the Nasdaq, the list of public Orange County companies is dominated by technology stocks. The Bloomberg Orange County Index, which tracks 129 local companies, plunged nearly 9% Monday and 17% Tuesday before the rebound began.

Although the Nasdaq index finished the day down only 74.79 points, or 1.8%, analysts said the swagger may have been slapped out of the market’s “new economy” sector for the time being.

Investors, they said, will be slow to return to the most speculative parts of the market, such as smaller Internet and biotechnology stocks that had rocketed early this year on potential rather than actual sales and earnings.

“The guys making promises they can’t fulfill will go away now,” said Rao Chalasani, market strategist at First Union Securities in Chicago.

Investor caution could slow the wave of stock offerings that have been launching new “dot-com” businesses and keeping slightly older ones afloat. A tighter financing climate would hasten the day when such firms must either start making money or shut their doors.

“Venture capitalists might have to focus more on protecting their existing portfolio than on investing in new companies,” said Fred Haney, a founding member of Tech Coast Angels, a Newport Beach venture capital organization.

The slide in technology stocks also could affect the broader economy by dampening consumer confidence enough to make people rein in spending.

For that reason, a prolonged stock-market slump could restrain the Federal Reserve Board from raising interest rates further, some observers believe.

“The plunge today is serious enough that any thought of wealth driving the economy is going to be tempered at minimum, and unless there’s a reversal right away, the Fed is more inclined to be mild with their actions,” said Richard Rippe, chief economist at Prudential Securities.

Tuesday’s selling, which took recent favorite large and small tech stocks down sharply in the first few hours, was slow to develop. The Nasdaq market actually inched higher in the first few minutes.

But investors then began to dump technology shares in a nearly relentless cascade. Shortly after 1 p.m. EDT the Nasdaq composite hit 3,650--which represented a 28% loss from its record high close of 5,048.62 on March 10.

Thus, in the space of 3 1/2 weeks, Nasdaq shifted from spectacular bull market--up 24% year-to-date as of March 10--to a genuine bear market.

The selling frenzy was sparked in part by “margin” calls hitting investors who had borrowed record sums in recent months to buy stocks--an extremely speculative strategy.

With Nasdaq down nearly 8% last week and down another 7.6% Monday, lenders started demanding more cash of these borrowers, forcing many investors to sell stocks and close out their loans.

Tuesday’s action was chaotic enough to prompt a top White House economic aide to issue a calming statement Tuesday afternoon.

“We believe that the very fundamentals of our economy look still very, very strong,” Gene Sperling, the president’s chief economic advisor, told reporters.

Many analysts also were impressed with the ability of the Nasdaq Stock Market and the NYSE to process a new high in share volume. But many Wall Streeters expect more pain in the markets.

The tech sector has “a brick wall hanging over its head,” said Peter Canelo, chief investment strategist at Morgan Stanley Dean Witter.

“So many people on margin got blown away,” Canelo said. “You just don’t come back with the same enthusiasm.”

Tuesday’s market was buoyed when some investors decided, as they have again and again during market downturns in recent years, that many battered tech stocks had become good buys.

Shares of QLogic Corp., an Aliso Viejo maker of computer components, plunged 24% on Monday but gained 7.6% Tuesday to close at $110.94 a share in Nasdaq trading. Troy Group Inc. in Santa Ana, which develops computerized financial payment systems, fell 12.7% Monday and then gained 5.2% Tuesday to close at $25.25.

Indeed, many technology executives seemed unperturbed by the chaotic markets, said Newport Beach lawyer David Krinsky, an O’Melveny & Myers partner who specializes in initial public stock offerings, mergers and acquisitions.

“I was the one calling them and saying, ‘Maybe today isn’t the best day to be talking to the underwriters’ ” about public offerings, Krinsky said. “They were the ones shrugging things off, telling me not to worry. There was a definite feeling that everything would bounce back by tomorrow.”

Chet Needelman isn’t so optimistic. The chief executive of Palley-Needelman Asset Management in Newport Beach, which concentrates on larger, established “old economy” stocks, said high-tech stocks are still overvalued.

“One should not assume the debacle in tech stocks is over,” he said. “The excess that has been building in the Nasdaq for the past 15 months is beginning to catch up with it.”

The Bloomberg Orange County Index wound up at 343.66 Tuesday, off just 1.3% for the day but still 25% below its all-time high, set only last month.

Investors with less exposure to volatile technology stocks seemed to be tolerating the markets with concern but not panic. Customer calls to First Security Van Kasper brokerage in Newport Beach, for instance, were heavy but not overpowering, said broker Craig Reynolds.

One investor called from Dubai, where he had docked while on a cruise vacation, and another phoned while playing golf in Hawaii. Neither had significant losses, “and the biggest worry of the day for the guy in Hawaii was wind on the [golf] course,” Reynolds said.

However, should Nasdaq and local stocks continue to fall, experts say the local economy could suffer from a reversal of the “wealth effect,” the recent phenomenon among suddenly rich consumers to spend their stock-market gains.

The surge in housing prices in areas like Orange County and Silicon Valley could go on hold should the value of portfolios and stock options make “new economy” participants less sanguine about their futures.

Esmael Adibi, director of Anderson Center for Economic Research at Chapman University, said the impact will be limited if, as in past “corrections,” the market again rebounds quickly.

But he said a longer downturn could hit Orange County hard because it has so many new and growing companies that have tied employee compensation to corporate stock prices.

The market’s unpredictability also is affecting strategic corporate decisions.

Quest Software, an Irvine business software maker, had been using its high-priced stock to buy smaller companies. But its shares, which traded at $97.50 at one point last month, closed Tuesday at $53.75.

Fortunately for Quest, the company picked up nearly $254 million last month in a secondary public offering and has “quite a bit of room” to maintain its expansion, said John Laskey, Quest’s chief financial officer.

“We’ll probably change over to using a higher percentage of cash and a lower percentage of stock” to buy other companies, Laskey said.

Still unknown is the impact of Monday and Tuesday’s wipeout on mutual-fund investors, many of whom have been pouring money into technology funds in recent weeks. A record $54 billion flowed into stock funds--mostly aggressive-growth stock funds--in February alone.

If many investors decide to take their losses and flee, there could be a flood of fund redemptions that would drive the market lower in coming days.

Stanley Nabi, strategist at Wood Struthers & Winthrop, predicted that the Nasdaq index would sink again to the levels it touched during the worst of the sell-off--3,600 to 3,700.

More optimistic was Edward P. Nicoski, technical strategist at U.S. Bancorp Piper Jaffray in Minneapolis, who said this week’s technology crash “really felt like a typical, old-fashioned selling climax.”

“This kind of panic, get-me-out activity occurs close to the end of a down sequence,” agreed Ralph Bloch, chief technical analyst at Raymond James Financial. “Bear markets don’t start this way--they end this way,” he said.

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Times staff writers Marc Ballon, Robin Fields, Greg Hernandez, P.J. Huffstutter and Times wire services contributed to this report.

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Orange County Stocks Plunge--And Rebound

Shares of Orange County companies dropped drastically during trading before pulling back. The Bloomberg Orange County Index of 129 public companies fell 17% from the opening trade, but recovered almost all of it.