Net Stocks Soar On Yahoo Earnings

Internet stocks soared Wednesday morning on better-than-expected earnings from Yahoo.

The ISDEX bolted 44 to 740, a day after closing just below the important 700 level. The Nasdaq rose 97 to 4054, just below key resistance. The S&P 500 gained 6 to 1487, flirting with the important 1488 level. The Dow added 41 to 10,768. Volume rose slightly, to 460 million shares on the NYSE and 780 million on the Nasdaq. Advancing issues led 14 to 11 on the Big Board and 21 to 14 on the Nasdaq. Ariba will report earnings after the close, and Juniper Networks will report tomorrow. The Producer Price Index for June will come out on Friday.

Yahoo led Net stocks higher in a broad, sharp advance, rising 17 1/4 to 122 3/4. Analysts had been making cautionary comments about the company for weeks, based on weakness in Internet advertising. But Yahoo surprised with earnings of 12 cents per share, beating analysts estimates (10 cents) and the whisper number (11 cents). Revenues ($270 million) and page views (680 million) also topped estimates. In the conference call, Yahoo said that less than 10% of its advertisers are financially questionable, and said the Internet shakeout could benefit the company. The company did not reveal how much of its revenues come from Internet companies. The company’s comments were less cautious than analysts had been predicting. In an interview on CNBC, Yahoo Chairman Timothy Koogle would not say whether the company’s margins will decline, a concern of analysts who expect the company to increase spending in the third or fourth quarter. Koogle said analysts should expect margins in the 34-38% range. Morgan Stanley Dean Witter analyst Mary Meeker raised her revenue and earnings projects for the company, but did not raise her Outperform rating. For more on Yahoo’s earnings, click here.

Internet stocks rebounded strongly on the Yahoo news. eBay rose 5 to 48 15/16, but remained below the important $50 level. DoubleClick recovered 2 9/16 to 31 1/16. InfoSpace regained 3 1/16 to 46 7/16.

Advertising-supported portals soared. AskJeeves added 1 11/16 to 15 11/16, CNET rose 3 1/16 to 24 1/2, and GoTo bolted 3 1/16 to 13 3/8. Donaldson, Lufkin and Jenrette said it expects an upside earnings surprise from GoTo. For more on GoTo, click here.

Ariba rose 6 7/8 to 98 ahead of its earnings report, flirting with its 99 1/2 cycle high. Commerce One added 5 3/16 to 47 11/16. Microsoft may invest in the company. CMGI gained 4 7/16 to 40 15/16.

Interwoven gained 11 7/16 to 138 9/16 on a CS First Boston Buy rating after the acquisition of wireless and XML technology developer Neonyoyo. CSFB said it expects the company to exceed estimates.

PSINet fell 1 3/16 to 18 15/16 after DLJ downgraded the company from Top Pick to Buy and expressed concern about the company’s earnings.

Exodus soared 5 11/16 to 42 11/26 on news of an alliance with Alteon WebSystems , which soared 30% yesterday after announcing that it will become profitable in the fourth quarter, three quarters ahead of expectations.

Some technical comments on the market: Tantalizingly close to breakouts on the Nasdaq and S&P 500. The S&P 500 moved above 1488 resistance this morning, the tip of the right shoulder of that index’s bearish head-and-shoulders formation, but turned back at 14

93. A clean break of that number would be bullish, and would set up a test of 1508, the 78% retracement level. To the downside, the lower boundary of the head-and-shoulders is around 1380. The Nasdaq is close to its previous reaction high of 4073. A move above that number and then the 50% retracement level of 4087 could give the index room to 4300, based on the 250-point trading range the index has been mired in since turning back at 4073. Also, there is a gap down from 4188 to 4094 from April 11, adding to the resistance in this area. A break of 4100 would pretty much take out all three numbers (4073, 4087 and 4094). The index began the year at 4069. Recent support on the Nasdaq is in the 3820-3830 range, and key support is at 3725 and 3585. The index is still forming a flat-bottomed broadening pattern, however, a potentially bearish development. The ISDEX broke key support at 700 yesterday, but that break was suspect, given that analysts’ concerns about Yahoo were either wrong or premature. Yahoo has given the index a much-needed boost, but remains in a broadening pattern. The ISDEX has been consolidating at the top of its three-month trading range, which is a plus, but its recovery has been halted in the 790 area, just above the 38% retracement level from the high (1130) to the low (560). A move above 790 would be bullish, while a substantial break below 700 could give the ISDEX room to 600. Today’s action is very positive, and could set up a test of 790. The Dow is back above its 200-day moving average (10,747) and has broken its downtrend since reaching 11,100 in late April, both very positive developments if the index can hold them. The Dow may have broken its bearish diamond pattern yesterday, but volume was not spectacular. And don’t forget, we want to break the diamond by 3% on high volume; that would put the index north of 11,000, the point at which a pure drawing of the lines would place the Dow diamond’s upper boundary anyway. And finally, the advance-decline line on the NYSE has been steadily improving, and the index is just short of an all-time high (661).

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