Tech stocks no longer above the fray; Nasdaq feels pain

Investors taking comfort in the fact that tech stocks have been relatively unscathed in the recent slide will have to look elsewhere for consolation.
The Nasdaq composite just had its worst two days of the bull market, a 4.6% drop capped by a 53-point plunge to 2696 Thursday. It could have been far worse: Earlier the Nasdaq was down 101 points.
It's a startling development because tech, which had been relatively immune to problems caused by the credit crunch and the weak dollar, is beginning to feel the pain from other areas of the economy. Cisco Systems fanned those worries when it warned late Wednesday that some big customers were slashing spending.
"It's been an immaculate situation for tech names like Google (GOOG), Apple (AAPL), Research In Motion (RIMM) and Cisco (CSCO)," says Bernie Schaeffer of Schaeffer's Investment Research. "Now tech stocks are grabbed into the muck with the rest of the market." That resulted in intense selling in stocks that had led the Nasdaq's charge this year. Google, for instance, ended Thursday down $39.10 at $693.84 after briefly being down nearly $56 a share.
The profit taking could persist, analysts say, because some of the factors dragging the stocks down could take time to correct, including:
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• Lofty valuations. Encouraged by strong earnings growth, investors piled into Google and Apple thinking they will be the leaders in the next wave of tech, says Jordan Kimmel, president of Magnet Investment.
But many investors lost sight of what they're paying to own these stocks. Google, for instance, trades at 54 times its earnings over the past 12 months. Apple trades at 45 times earnings. "Some tech stocks … got ahead of themselves," he says.
• Overall market jitters. Problems in the subprime and housing markets may not directly hurt many tech stocks, but they still cause investors to temper their bullishness about the economy, says Chris Orndorff of Payden & Rygel.
Massive write-downs by investment banks "changed peoples' perceptions about the severity of the crisis," he says, and provided an excuse to sell stocks with big gains.
• Shifting momentum. Investors have been so certain Google, Apple, Research In Motion and Cisco were untouchable, they kept piling in, says Robert Maltbie of Millennium Asset Management. But those same investors are the first to lock in profits with even a whiff of bad news from the industry, he says.
Schaeffer thinks investors can still profit by buying tech stocks and avoiding financial stocks. Maybe so, but Maltbie thinks investors will need to avoid the most popular tech stocks that have run up the most and therefore still stand to correct even further. "It's a shrinking opportunity in tech," he says.