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ISDEX Drops 15%; Is This the Bottom?

ISDEX, The Internet Stock Index, ended the day down 15.4%, closing at 88.23, as the market continued its broad-based sell-off.

ISDEX began the year at 99.87 or 13% higher than today's selloff. In the past three trading session ISDEX has lost more than 25% of its value.

Bookseller Amazon.com was among the hardest hit, down 22 points to $83.75 per share. @Home lost 22 percent of its value, dropping 8.25 points to 28.5.

Some of the recent high-flyers were hit especially hard. Yahoo (NASDAQ:YHOO) was off 14 1/16 points to close the day at $69 per share while AOL (NYSE:AOL) dropped 14 5/16 to 81 15/16. Only one stock rose: VeriSign gained 1/8 on the strength of significant news about an IRS pilot program.

The question now: is this the bottom? We believe that ISDEX may be approaching its bottom if the market in general shows signs of stability in the next few days. Our analysis shows ISDEX tends to reflect the wild mood swings of the market both high and low due to its more speculative nature of stock and more dynamic risk-reward ratios at play.

We also believe that the past three trading days may be more emotional than fundamental, that the basic underlying businesses of most of the 50 stocks in ISDEX haven't changed to the degree that the fall has indicated. On the other hand, stocks that rode highest in this space may have more to give.

We're never comfortable with any stock in ISDEX trading at more than 10x revenue. Many of the search/navigation stocks and Amazon fall into that group even still, after the tumble.

On average, the group of 50 stocks in ISDEX trades between 7x to 9x revenue after the correction. Just over a week ago that average was 9x to 11x trading multiple.

ISDEX hit its all-time high April 21, at 185.66. As recently as July 7, ISDEX was at 180.73. So today's record fall -- and an index down 8% from where it began the year--may provide for those who can handle risks to jump back in soon. If the market continues to drop then we're reminded of the all-time ISDEX low: April 23, 1997, when ISDEX stood at 65.76.



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