Security, Storage Latest Sectors To Get Hit

Internet and technology stocks began the new year on a familiar down note, led lower by security and storage stocks.

The ISDEX http://www.wsrn.com/apps/ISDEX/ fell 49 to 311, and the Nasdaq declined 178 to 2291, both new closing lows. The S&P 500 declined 37 to 1283, and the Dow lost 140 to 10,646. Volume rose to 1.1 billion shares on the NYSE, but declined to 1.93 billion on the Nasdaq. Decliners led 17 to 13 on the NYSE and 23 to 16 on the Nasdaq. The National Association of Purchasing Management survey fell to its lowest reading since the last recession a decade ago, giving hope that the Federal Reserve will soon cut rates, but inflation pressures were higher than expected. The big economic report for the week will be Friday’s employment report, and some observers think it could be weak enough to prompt an intermeeting rate cut from the Federal Reserve. 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.

Internet infrastructure stocks continued to get hit on fears of lower capital expenditures. Inktomi again led the parade lower, falling 3 1/2 to a two-year low of 14 7/16, on downgrades from Merrill Lynch and Robertson Stephens.

Robbie Stephens downgraded a host of stocks in the Internet infrastructure space on concern that the companies will be hit by the economic slowdown, among them: CacheFlow , down 3 1/4 to 13 13/16, Netegrity , off 13 11/16 to 40 11/16, Quest Software , down 4 9/16 to 23 1/2, EMC , off 12 3/16 to 54 5/16, Certicom , down 3 3/4 to 16 5/8, Internet Security , down 13 1/4 to 65 3/16, NetIQ , off 22 3/8 to 65, Network Appliance , down 12 5/8 to 51 9/16, Network Engines , down 1 29/32 to 2 9/32, Verisign , down 12 1/8 to 62 1/16, and Veritas , off 21 1/2 to 66.

Robbie Stephens maintained its Buy rating on CheckPoint , which fell anyway, off 23 1/16 to 110 1/2.

An earnings warning from Intershop , off 10 5/16 to 4 13/16, sent e-CRM software stocks lower. Art Technology fell 7 5/16 to 23 1/4, and BroadVision lost 2 3/16 to 9 5/8.

Ariba fell 11 5/8 to 42, and Commerce One dropped 6 1/16 to 19 1/4.

Cisco Systems fell 5 1/8 to 33 1/8 on concern that the company could warn. The company makes an important presentation Jan. 10.

Terra Lycos was one of the few bright spots, slipping only 1/4 to 10 5/16 on strong holiday sales.

Intermedia Communications rose 1 3/32 to 8 9/32 on optimism that the company’s merger with Worldcom will go through. Digex , which is majority-owned by ICIX and whose shareholders had hope to split up the merger to get a better price for Digex, fell 3/4 to 21 3/4.

Some technical comments on the market: Note: We are now including charts in the technical market commentary. If you can’t get the charts via the e-mail newsletter version, try this link: http://www.afterhourstrading.com/column.html

Volume, the number of new lows and market internals are much improved on this retest of the Nasdaq’s 1990 logarithmic trendline at 2300 (first chart), all positives. However, the new closing low i

s bearish. The Nasdaq’s breakdown out of a rising wedge or bear pennant Friday (see second chart) gives the index downside to anywhere from 2300-2000. Gaps were filled today at 2224 and 2340 on the Nasdaq 100 and the Nasdaq and 328 on the ISDEX, but a gap remains at 1275 on the S&P 500. Hopefully that gap will fill tomorrow so we can reverse upward. We continue to watch the January indicator, which basically says that as the first five days and the month of January go, so does the year, so we want these first five days to be positive.

The S&P 500 broke out of a bear pennant or flag today, setting up a potential retest of the 1250 level. That pattern gives the index potential downside all the way to 1200; let’s hope we fill the gap at 1275 and turn up from there.

The Dow failed at critical 10,900 resistance Friday for the fifth time. A clean break of 10,900 would likely carry the index to 11,500, with the caveat that it could face resistance at 11,000, 11,200 and 11,400. To the downside, 10,600-10,650 is strong support, and is so far holding. A break of the lower support at 10,300 would likely lead to a retest of the 9700 lows. A close above 11,000 on the Dow and 3000 on the Dow transports (125 points from here) would be bullish under Dow theory, the oldest school of technical analysis, and could be bullish for the whole market.

Special report: For a free introduction to technical chart patterns and an overview of this year’s action in the stock market, visit http://www.internetstockreport.com/guest/article/0,1785,2571_500051,00.html.

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