Nets Rest as Stocks Rise

Stocks rose Wednesday on strength in Microsoft, but Internet shares rested after a strong recent run-up.

The ISDEX closed down 1 to 776. The Nasdaq gained 50 to 4063, the S&P 500 gained 3 to 1478 and the Dow gained 62 to 10,497 after testing 10,400. Volume declined slightly, to 1 billion shares on the NYSE and 1.53 billion on the Nasdaq. Breadth was negative, with declining issues leading 16 to 12 on the Big Board and by a hair on the Nasdaq.

Traders ignored negative earnings news from Oracle and Intel and focused on strength in Microsoft , which rose sharply on news that its antitrust appeal will go straight to the Supreme Court. OPEC raised output less than was needed to reverse rising oil prices, while Alan Greenspan gave no hints in Senate testimony ahead of the Federal Reserve meeting next week.

Shares of Yahoo! dragged on the ISDEX, falling 5 3/16 to 142 13/16 after Lehman Brothers initiated coverage of Yahoo and the Internet media group with a Neutral rating. The stock turned back yesterday at the key resistance level of 150.

Globix fell 2 3/16 to 33 13/16 on rumors that the company may miss earnings estimates. The rumors also hit Exodus , off 3/16 to 54 3/16 after completing a 2-for-1 stock split, and Digex , off 3 3/8 to 75 3/4. Exodus also filed with the SEC to sell up to $2 billion in new debt and equity securities in one or more public offerings over the next two years.

Shares of iBasis gained 3 3/4 to 36 1/4 on news that the firmed signed a deal with number 3 Chinese phone company Jitong Communications. Jitong will be able to send international voice and fax traffic over iBasis’ network, and international calls can be completed from the iBasis Network to destinations in China.

Akamai soared 12 1/4 to 116 1/4 after Chase H&Q analyst David Levy initiated coverage with a Buy rating and a price target of 175-180.

One positive aspect of Oracle’s earnings report was that it revealed strength in business-to-business e-commerce solutions. Ariba gained 6 13/16 to 96 13/16, extending its gains after clearing a two-month base yesterday. Based on the size of Ariba’s rectangle pattern (49 to 83), the stock could potentially go as high as 117. Shares of PurchasePro gained 6 5/16 to 42 13/16, and FreeMarkets gained 7 23/32 to 50 27/32.

Shares of Commerce One , up 1 5/8 to 44 5/8, and AppNet , up 1 3/16 to 34 1/2, recovered a day after announcing merger plans, hoping to speed the development of B2B exchanges. For more on the deal, click here.

Shares of OnDisplay gained 3 1/4 to 75 1/2. The stock broke out of an ascending triangle at 68 yesterday, a classic bottoming pattern. Shares of AOL declined 5/8 to 57 1/4 a day after breaking its downtrend on high volume. Shareholders are expected to vote on the company’s merger with Time Warner on Friday.

Red Hat extended its gains, up 1 5/16 to 31 1/28, a day after news that Dell announced that it will expand customer support for Linux software, putting it on a par with Dell’s support for Microsoft Windows.

Inktomi gained 3 5/16 to 148 9/16, a day after rising 5 3/4 on positive comments from Merrill Lynch. The company expects 30% sequential growth for the next two to four quarters.

Virata Corp gained 9 3/4 to 59 3/4 after pre-announcing first quarter revenues of $25-27 million, a 115% increase from the prior quarter. The company also announc

ed a proposed offering of 4 million shares and the acquisition of Excess Bandwidth Corp. for $315 million in stock.

Fiber optics stocks resumed their leadership but then fell back. Analysts raised concerns about valuations in the group yesterday. Corning fell 1 3/8 to 241 15/16 and SDL Inc. fell 2 3/8 to 293 13/16. But Osicom added 18 15/16 to 86 1/4.

Shares of recent IPO Sonus Networks soared 19 3/4 to 131 3/4, a new high.

SonicWall gained 10 15/16 to 87 1/2 on news that Compaq will resell the company’s Internet security appliances. Learn2.com gained 11/16 to 2 5/8 on news that Compaq will offer e-learning to Compaq’s consumer customers.

Shares of Broadcom , up 5 1/2 to 172 5/16, continued to gain on news that it will be added to the S&P 500.

Some technical comments on the market: A positive day, with the Nasdaq getting closer to the 50% retracement level (4087). However, volume declined and breadth was again negative; the breadth picture will need to turn around to make this advance sustainable. However, the Nasdaq’s resilience in the face of bad news is a plus, and a break of the 50% retracement level would tip the equilibrium to the upside; we turned back at 4050 yesterday and 4073 today. On the downside, we want to stay above 3900 (3893), which would constitute a retracement to the upper boundary of the consolidation range, a not uncommon occurrence. A move below that would give us a false breakout. The ISDEX could be forming a cup-and-handle, and is just below major resistance at 800. A break of that level would be a real plus for Net stocks. Again, the two most important numbers to watch are 1480 on the S&P 500 and 10,375 on the Dow: the upper and lower boundaries, respectively, of their bearish diamond patterns. A clean break of either number should tell us a lot about the market’s direction. On the S&P, a close above 1507, the 78.6% retracement level, would be a real plus; the index’s recent rallies have all ended when the futures reached the 1508 level. A break of the Dow’s lower diamond boundary would set up a test of the base of its bearish descending triangle in the 10,200-10,300 range. A break of 10,200 would probably send us to about 9,500 on the Dow (the move predicted by the descending triangle), although a break of the diamond pattern would predict an ultimate downside of 8,400 or lower. A break of 10,775 to the upside would be bullish.

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