New Economy Back With a Vengeance

The dichotomy between the new and old economy returned on Tuesday, as Net and tech stocks gained while blue chip issues continued to lose ground. The ISDEX rose to the top of a two-month trading range.

The ISDEX rose 29 to 777, down from an intraday high of 787, just under major resistance at 800. The Nasdaq ran into resistance at 4050, but finished up 23 to 4013. The Dow battled triple-digit losses all day, closing down 122 at 10,435. The S&P 500 lost 9. Volume rose to 1.68 billion shares on the Nasdaq and 1.02 billion shares on the NYSE. Breadth was negative, with decliners leading advancers 16 to 12 on the NYSE and 20 to 18 on the Nasdaq. After the bell, Oracle reported earnings that were better than analysts expected, but revenue was on the light side, and the stock declined in after-hours trading.

After a premature announcement yesterday, Commerce One and AppNet made it official: they will merge in a stock-for-stock exchange. Commerce One will issue 0.8 shares for each outstanding share of AppNet. Neither stock was helped by the news: Commerce One fell 8 1/16 to 43 3/8, while AppNet declined 1 19/64 to 33 3/16.

The ISDEX’s advance was broad-based, with only 10 issues ending lower. Broadcom soared 19 19/64 to 166 51/64 on news that it will be added to the S&P 500. Ariba bolted 8 1/4 to 89 7/8, clearing a two-month base. Other issues leading the ISDEX higher included Go2Net , up 8 7/8 to 49 15/16, Broadvision , up 7 15/16 to 60 7/8, VerticalNet , up 4 1/16 to 41 1/2, and DoubleClick , which recovered 3 15/16 to 41.

Shares of Digital Island soared 10 19/32 to 45 3/32 on news that the company will team with tech giants Compaq , Intel and Microsoft to build the world’s largest streaming media network. The firms will make a combined equity investment of $45 million in Digital Island to support its infrastructure development.

Industry leaders returned to form. Shares of eBay gained 2 7/16 to 62 5/16, Yahoo! gained 8 11/16 to 147 3/4, AOL added 3 1/2 to 57 13/16, and Inktomi rose 5 3/4 to 144 on positive comments from Merrill Lynch. The company expects 30% sequential growth for the next two to four quarters.

Shares of Red Hat bolted 4 7/16 to 29 13/16 on news that Dell will announce plans to expand customer support for Linux software, putting it on a par with Dell’s support for Microsoft Windows.

Exodus Communications rose 4 3/8 to 109 1/8, down from an intraday high of 114 7/16, ahead of its 2-for-1 stock split. Sonus Networks rose 3/4 to 113 3/4, down from an intraday high of 126 7/8, a day after the company’s post-IPO quiet period ended. fell 1/2 to 1 1/2 after it announced that revenues will be below expectations for the rest of the year, but that the loss for the current quarter will be slightly better than expected due to a 15% layoff and a renegotiated agreement with Express Scripts .

Engage rose 1 1/4 to 16 5/8 on news that parent company CMGI and Compaq have made a combined investment of $75 million in the company, in exchange for 5 million shares of common stock.

Some technical comments on the market: The Nasdaq ran into resistance at 4050 today, just below the 50% retracement level of 4087, but finished the day above 4000. A volatile day on high volume; it could be a sign of a reversal, or it could be the beginning of a new advance. One positive is that the index found support at 3982, the resi

stance level it broke through yesterday. But judging from the index’s first attempt, resistance in the 4050-4150 area could prove as difficult to surmount as the 3850-3900 level was. The increase in volume could mean that the break above 4000 is drawing buyers back into the market. If so, breadth will need to improve to make the advance sustainable. The ISDEX is nearing critical resistance at 800, and a break above that would be bullish for Net issues. That said, 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; interestingly, 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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