Rate Cut Versus Earnings Warnings: Which Will Prevail?

It came a few days late, but the gift investors have been desperately waiting for arrived Wednesday as the Federal Reserve unexpectedly cut short-term interest rates by a half-point.

The decision sparked a huge one-day rally that saw the Nasdaq gain 325 points, or 14.17% – its best single day of trading in history. For the record (and savor this while you can), the Nasdaq – fresh off its worst year ever – is now up 5.9% so far in 2001, despite Tuesday’s huge selloff.

And just as Internet stocks led the market down last year, so too did ‘Net tickers lead Wednesday’s recovery. The ISDEX, internet.com’s Internet Stock Index, soared 22.39% on Wednesday.

Even better for investors, there are indications that more cuts will be on the way.

Does that mean the Fed finally has given the market a bottom? I think it’s too early to tell. I believe the key is to see how the market reacts in the next few days and weeks to the many earnings warnings headed its way. If the rate cut truly has reversed (or at least halted) the precipitous plunge, then warnings from individual companies won’t drag down the overall market or devastate sectors as they have in recent months.

One immediate indication could come from the infrastructure sector. Caching server software market leader Inktomi issued a Q1 warning after the market closed on Wednesday, and just one day after being downgraded by Merrill Lynch on general concerns about a slowdown in technology spending by major corporations.

Despite the downgrade, INKT joined other ‘Net stocks in Wednesday’s rally, climbing 27% from Tuesday’s close of $14.56, its lowest finishing mark in more than two years. But after Wednesday’s warning (in which the company said it should at least break even), INKT shares plunged as much as 27% in Europe.
It will be interesting to see not only what happens with INKT on the Nasdaq Thursday, but also rival caching software vendor CacheFlow , whose shares climbed 29% on Wednesday.

On Friday we’ll take a look at the ISDEX, which saw 11 new members join this week.

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