Investors Shake Off Yahoo Warning

Investors shook off a dismal profit outlook from Yahoo to send Internet and technology stocks sharply higher on Thursday.

The ISDEX http://www.wsrn.com/apps/ISDEX/ surged 16 to 375, and the Nasdaq climbed 43 to 2585. The S&P 500 rose 6 to 1319, but the Dow declined 43 to 10,560. Volume declined slightly to 560 million shares on the NYSE, but rose to 1.1 billion on the Nasdaq. Advancers led by 14 to 12 on the NYSE, and 22 to 11 on the Nasdaq. The Producer Price Index for December will be reported tomorrow. For earnings reports, visit our earnings calendar at http://www.wsrn.com/apps/earnings/internet.xpl and reported earnings at http://www.wsrn.com/apps/earnings/ireported.xpl. For after hours quotes and news, visit our after hours trading site at http://www.afterhourstrading.com.

Yahoo fell 4 7/8 to 25 5/8 after meeting earnings estimates of 13 cents a share. Revenues for the quarter came in $4 million light at $311 million. But the company’s outlook for the year was what really caught analysts by surprise: Yahoo said full-year earnings will come in at 33-43 cents a share due to economic weakness, well under analysts’ 57-cent estimate. The company also guided full-year revenues down to $1.2-$1.3 billion from estimates of $1.4 billion. DoubleClick , off 1 1/16 to 11 3/8, reports earnings tonight.

Ariba , up 3 11/16 to 43 3/4, reports earnings tonight; analysts expect earnings of 2 cents a share. i2 , up 2 1/4 to 50 1/4, continued to rise after a bullish profit forecast, and Commerce One rose 1 5/8 to 23 5/8.

eBay shook off Yahoo’s earnings warning to rise 1 to 40 5/16, continuing to gain on a positive presentation by CEO Meg Whitman.

Cisco , off 9/16 to 35 11/16, and Juniper Networks , up 8 to 127 5/16, continued to diverge. Cisco admitted yesterday that the slowdown in capital equipment spending was affecting the company, and Juniper has been stealing market share from Cisco. Juniper reports earnings Tuesday.

Broadcom , a major Cisco and Motorola supplier, rose 6 1/16 to 116 despite anemic profit news from both companies.

Rational Software surged 6 5/8 to 45 3/4 after the company’s 20-cent earnings beat estimates by 2 cents. SG Cowen downgraded a host of Internet enabling software stocks on recent weakness in business, including Rational Software, BroadVision , off 3/8 to 14 13/16, Vignette , up 3/4 to 13 1/4, BEA Systems , up 2 to 58 1/4, Serena , down 1 3/8 to 28 3/16, and TIBCO , up 2 7/16 to 42 1/16.

Digital River rose 1 9/16 to 4 11/16 after pre-announcing better than expected results and saying it expects to achieve profitability in the first quarter.

Extended Systems soared 5 to 19 3/8 after pre-announcing better than expected results.

PurchasePro rose 1 1/2 to 17 1/4 on a deal with Honeywell .

Audiohighway.com , halted at 3/8, filed for Chapter 11 bankruptcy protection.

VerticalNet , up 7/8 to 5 1/2, and SierraCities , up 1/32 to 1 11/16, called off their merger due to market conditions.

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The Nasdaq is close to its downtrend line (first chart) at around 2650 and could be putting together its first three-day winning streak since Sept. 1. We don’t know if the index has the power to get through that line just yet, but the action remains very positive. The Nasdaq began to form a rising wedge in the last couple of days (second chart), but because volume was rising within the pattern instead of falling, the formation was bullish instead of bearish, which the index proved by breaking above that upper trendline this morning. Always keep an eye on volume within patterns.

The ISDEX is right at critical resistance (385), and could be headed to 470 if it can close above 400. Amazing considering Yahoo’s earnings warning. As we said last night, bottoms occur when investors become inoculated against further bad news, long before the fundamentals improve.

The S&P 500 broke out of an ascending triangle this morning (first chart), and could be headed for a bout with its downtrend line at about 1445 (second chart).

The Dow continues to find resistance at 10,600, the level where the Fed cut interest rates. Not a good sign for the overall market; remember that healthy markets move in sync, so the Dow needs to catch up soon. The Dow retraced to the neckline (10,500) of an inverse head-and-shoulders bottom yesterday, and continues to try to turn up. Critical support on the Dow is 10,300, while a close above 11,007 would confirm a new bull market under Dow Theory.

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