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eBay Struggles

eBay , the giant among Internet stocks, is struggling.

The reason given for eBay's latest sell-off yesterday was that the company will soon announce an acquisition that will be dilutive to earnings. Analysts debunked the rumors, and the stock recovered well off its lows and is trading up this morning on bullish comments from Goldman Sachs.

Even before yesterday, eBay's share price had been under pressure for some time. So what's up with eBay? It has a booming consumer business, a growing list of corporate users, and even seems to be benefiting from the slowing economy as a seller of distressed inventory. So why the decline?

Stock message boards claim that insider selling is one of the reasons, but frankly, we've seen far more insider selling at other big-name companies, and in eBay's case, it is not necessarily a sign of trouble at the company. Who wouldn't take profits after the run eBay's had?

The best guess here is that even eBay will eventually be affected by the slowing economy, perhaps by weaker consumer spending. Despite claims to the contrary, consumer spending has flatlined in recent months. Whether it eventually declines is unknown, but at the moment, growth in consumer spending is less than it was during the emerging markets crisis of 1998.

As we pointed out last month, eBay looked like it was forming a head-and-shoulders top. It still is, and has been slowly breaking down out of that pattern (see chart below). With a head at 71 and a neckline at 60, EBAY should have minimum downside potential to 49, and possibly eventually exceed that level. A move above 65 would be bullish.

One thing we couldn't include in last night's Market Close was whether the big-cap Nasdaq 100 tested and held its 1990 trendline, the last trendline remaining from the roaring 1990s.

Now that the monthly charts have updated overnight, we can say that it appears that the NDX tested and held that line at its 1468 low, which now becomes critical support for the market (see chart below). It's possible to draw that line lower using the April 4 low, which pierced that line, but we'll use 1468 for now.

Interestingly, 1468 was the last remaining minimum downside target from the head-and-shoulders tops that the major indexes broke down out of in June.

So will that line hold? We'd give it better than even odds of eventually breaking for a few reasons. First, it represents an unsustainable rate of return at a time when technology earnings are - let's face it - awful. Second, some big-cap stocks such as Microsoft and eBay appear to have more work to do on the downside. And third, every other trendline from the 1990s has broken. Why should this one be any different?

But that line could provide support for a while, and might even give the market a decent rally. Maybe.

The market's reaction to the Fed's latest interest rate cut followed a familiar pattern the last two days.

The market sold off on the day of the rate cut because of the Fed's view that the economy remains weak, and then rallied the next day. Pundits scratched their heads as usual and called it a delayed positive reaction to the rate cut, but we'd offer another expectation for yesterday's rally. Unhappy with the market's reaction to the rate cut, the Fed injected more than $10 billion in liquidity into the system yesterday, a near-record amount, to underscore that it will do anything to keep the economy and the market afloat. The Fed followed other recent rate cuts with similar action the next day.

Keep a close eye on the release of the Fed minutes from the June 27 meeting at 2 p.m. today. Traders want to see the reason for June's quarter-point rate cut and accompanying statement of economic weakness, an action and bias statement that closely mirrored Tuesday's Fed decision, for insight into what the Fed is watching here.