Another Tough Day For Net Stocks

Internet stocks had a rough day on Monday, led lower by a huge earnings warning from eToys. The broader market rose on speculation that the Federal Reserve may soon come to the rescue.

The ISDEX fell 25 to 417, and the Nasdaq declined 15 to 2648. The S&P 500 rose 13 to 1325 and the Dow soared 214 to 10,649 on a Wall Street Journal report that the Fed could move to an easing bias tomorrow and might even cut interest rates. The market had expected a change to a neutral bias from the Fed’s current tightening bias. Volume declined to 530 million shares on the NYSE and 945 million on the Nasdaq. Advancers led by 16 to 10 on the NYSE, but decliners led 21 to 14 on the Nasdaq. For earnings reports, visit our earnings calendar and reported earnings. For after hours quotes and news, visit our after hours trading site.

eToys plunged 23/32 to 5/16 after warning that revenues will come in at about half of analysts’ estimates. The company said it has enough cash to survive until March 31, and it retained Goldman Sachs to pursue strategic alternatives. Amazon.com dropped 2 15/16 to 19 15/16 after Merrill Lynch analyst Henry Blodget said Amazon’s alliance with Toysrus.com appears to be stealing market share from eToys, but that online toy retailing may have less potential than analysts thought. Ashford.com lost 13/32 to 5/8 after Goldman cut ratings on the e-tailing sector.

America Online plunged 6.25 to 42.71 on an earnings warning from merger partner Time Warner .

Goldman downgraded stocks across the Internet space, among them BroadVision , down 1 3/4 to 18 3/4, Blue Martini , off 1 7/8 to 13, Covad , down 5/32 to 2, Digital Island , off 1 5/16 to 4 11/16, and Navisite , down 7/16 to 3 1/8. DoubleClick rose 1/16 to 12 3/16 despite being dropped from Goldman’s Recommended List. Goldman put the cash value of DoubleClick at $7.30 a share.

Handspring dropped 3 15/16 to 43 5/8 as its lock-up period expired.

Terayon Communications plunged 7 15/16 to 5 5/8 on an earnings warning.

Cisco dropped 3 27/64 to 44 3/4 on concern that an increase in reserves could mean that the company’s customers may have difficulty paying.

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The market may be building in an easing bias or even a rate cut from the Federal Reserve tomorrow, so be careful if the Fed doesn’t at least lean toward an easing bias. Technology and Internet stocks continue to get battered, but positive signs continue to predominate: a much lower number of new lows, gaps filled, and potential higher lows. Of the main indexes, the Nasdaq and S&P 100 have the most promising looking patterns, potential double-bottoms or rectangles. On the Nasdaq, it’s possible that it may yet set lower lows, based on the distance from the previous consolidation, but we continue to believe the index is in the process of a successful retest of the 2523 level.

The S&P 100 has strong support around 685. Below that is 650 support.

The ISDEX found support at 410 today, just above a gap at 406. 400 is strong support on the index, and if it holds

that level, it too will form a higher low.

The Dow got back above 10,600, so it again has a bullish posture. The index could be forming an inverse head-and-shoulders, the latest pattern to predict a possible move above 11,000.

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