Nasdaq lumbers into bear market territory

— -- The tech-heavy Nasdaq composite Wednesday won the dubious honor of being the first major U.S. stock index to be in a bear market in more than six years.

After weeks of flirting with a 20% drop from its previous high, the unofficial definition of a bear, the Nasdaq finally succumbed and fell 31 points to 2279 — putting it 20.3% below its recent high set three months ago.

"At the beginning of the year, it wasn't as clear (we were) headed toward a bear market accompanied with a recession," says Hugh Johnson of Johnson Illington Advisors. "That has changed." The Nasdaq's rapid decline into a bear market is unnerving, because it:

•Marks the first tangible end to a major bull run started in October 2002. The small-stock Russell 2000 in mid-January was more than 20% off its record high last July, and the Standard & Poor's 500 is off to its worst start to a year in history. But the Nasdaq is the first major U.S. index to fall 20% from its most recent high, signaling an end to its bull run. The others aren't far behind, though. The Standard & Poor's 500 is off 15.3% from its early October record high, and the Dow Jones industrial average is down 13.9% from its most recent high.

The fact the Nasdaq is down so much is a warning to investors at large, says fund manager Robert Stimpson at Oak Associates. "The Nasdaq is kind of a leading indicator for the market."

•Indicates fallen leadership. The biggest bulls could ignore the market's troubles last year and point to massive gains by tech darlings such as online search company Google goog, computer and iPhone maker Apple aapl, online retailer Amazon.com amzn and cellphone maker Research in Motion rimm. But those leaders are faltering. All four of those stocks are down more than 25% this year, and Apple has collapsed 38%. Another leader, networking company Cisco csco, was down 15% before its shares fell more than 7% after hours Wednesday on a disappointing outlook (story, 2B).

The crushing losses show tech stocks also depend on a solid economy, says Jack Ablin of Harris Private Bank. That is a harsh reality considering analysts were calling for 20% earnings growth from technology companies this year despite the weakening economy. "Optimism ran ahead of reality," Ablin says.

•Erodes investor confidence. Even at its peak last year, the Nasdaq was still down 43% from its all-time high in March 2000. Still, investors were lured in by "story stocks" such as Apple, says Dan Seiver, professor of finance at San Diego State. "The market always mints new investors with short memories," he says. Bear markets are healthy in that they "wake up" those investors to reconsider why they paid so much for the stocks, Seiver says.

The fact the Nasdaq is off 20% is not necessarily a cause for alarm and is partly just noise, says Oliver Wiener, trader at BTIG. Still, having the Nasdaq in a bear market is a sign "there is a lot of stuff overhanging the markets that has yet to be resolved," he says.