Nasdaq drops, S&P dips on worries about tech demand

Reuters

Posted at Oct 07 2010 07:10 AM | Updated as of Oct 07 2010 03:10 PM

NEW YORK – Tech shares slumped on Wednesday, hit by worries about demand for semiconductors and data storage.

The Nasdaq bore the brunt of the day's selling, led by data system services provider Citrix Systems. The stock was down in sympathy with small-cap Equinix Inc, which plunged 33.1% to $70.34 after it issued a revenue warning late Tuesday. Citrix slid 14.1% to $60.15.

"You are starting to see a natural rotation and some profit taking in the cloud computing sector that has been red hot in the last few months," said TD Ameritrade chief options strategist Joe Kinahan in Chicago.

"So those investors that currently own Citrix are reconsidering the valuation at these levels."

Another blow to tech came from Morgan Stanley's downgrade of semiconductor companies Xilinx Inc and Altera Corp to "underweight" on concerns about a slowdown in Asian markets. Both fell more than 2%.

The broader market, meanwhile, was hamstrung by a poor reading on private-sector employment and speculation about further quantitative easing from the Federal Reserve.

The ADP Employer Services report said private payrolls fell by 39,000 in September, underscoring concerns about the weak labor market. But at the same time, it was a positive factor for market players anticipating more efforts from the central bank to boost the economy.

The Dow Jones industrial average added 22.93 points, or 0.21%, to 10,967.65. The Standard & Poor's 500 Index inched down 0.78 of a point, or 0.07%, to 1,159.97. The Nasdaq Composite Index dropped 19.17 points, or 0.80%, to 2,380.66.

While it was a modest gain, the Dow closed near its session high, which can sometimes be taken as a sign of strength in the market. The S&P 500 held well above the 1,150 level for a second day in a row, and is within sight of the 1,165 level, which is around the close on the day before the so-called "flash crash" in early May.

Hey, get off my cloud

Xilinx lost 2.4% to $25.71 and Altera fell 2.3% to $29.30. The PHLX Semiconductor Index, known as the SOX, dropped 1.6%, its biggest slide in a month. The index has eased since the start of the month after surging more than 13% in September.

The losses in the tech sector picked up speed after Equinix, a player in the rapidly growing business of cloud computing, said it had to lower prices to keep customers. Cloud computing is a term that describes the trend of tech companies supplying software, computing power and data storage online.

Equinix was among the 10 most heavily traded companies on the Nasdaq, putting it among much larger companies such as Intel Corp and Cisco Systems. Equinix was also the Nasdaq's biggest percentage loser. More than 30 million shares changed hands, while the stock's 50-day average volume is 738,489.

The ADP report came ahead of Friday's larger employment report from the government. Non-farm payrolls are forecast to come in unchanged on Friday, according to Reuters data, though private payrolls are expected to add 75,000.

"I think it's a 'win-win' for the market on Friday," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville.

"If the report comes in weaker than expected, it will prompt the thinking that the Federal Reserve will begin quantitative easing sooner than later and be more aggressive. If the report comes in stronger than expected, it means the economy might be doing a little better."

A sharp rise in the euro against the dollar at midday also put a cap on any declines, driving the front-month E-mini S&P futures contract higher, and pulling the cash market up with it. Futures traders have increasingly focused attention on the euro, given the high correlation between the currency and USequities.

On the earnings front, Yum Brands Inc gained 1.2% to $47.36 after reporting adjusted third-quarter earnings that beat expectations by a penny.

Alcoa will mark the unofficial start to earnings season on Thursday. Alcoa shot up 1.8% to $12.37.

About 7.52 billion shares traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq, below last year's estimated daily average of 9.65 billion.

Declining stocks slightly outnumbered advancing ones on the NYSE by a ratio of 8-to-7, while on the Nasdaq, three stocks fell for every two that rose.