Stocks Cheer Employment Report

Stocks rose strongly Friday morning as investors cheered a weaker-than-expected June employment report.

The ISDEX gained 3 to 746, but was weighed down by a downgrade to Yahoo. The Nasdaq gained 76 to 4036, back above the important 4000 level. The Dow rose 142 to 10,624, and the S&P 500 soared 22 to 1478. Volume rose slightly on the NYSE to 435 million shares, and rose 8% on the Nasdaq to 710 million shares. Advancing issues led 15 to 10 on the Big Board and 19 to 15 on the Nasdaq.

Non-farm payrolls added 11,000 jobs in June, well under the 245,000 expected by analysts. However, the numbers were skewed by temporary census workers leaving their jobs. The private sector added 206,000 jobs in June. The unemployment rate shrank to 4.0%, and wages rose 0.4%, both in line with expectations. Yahoo will kick off earnings season July 11, and Ariba will follow on July 12.

Yahoo fell 5 3/4 to 16 5/8, hit by a downgrade to Buy from Strong Buy by Deutsche Banc Alex. Brown analyst Andrea Williams, based on valuation. Her valuation model was based on a 30% annual return in Yahoo’s stock price for five years, giving the company a market cap of 250 billion. To attain that, she said Yahoo will need a price-to-earnings ratio of 30 at that point. To do that, Yahoo would need to generate 8 billion in earnings and 30 billion in revenue in five years, or an annual growth rate of 111%, three times her projected growth rate for the company.

Williams also downgraded FairMarket , off 33/64 to 5 21/32, Safeguard Scientific , down 1 11/16 to 30 3/4, and TMP Worldwide , off 1 11/16 to 74 1/4. She said other stocks vulnerable to slower revenue growth are About.com , off 2 1/4 to 28 7/8, Lycos , up 1 5/16 to 50 9/16, and AOL , up 1 1/16 to 57 3/16. Williams said that earnings season “could bring more bad news for the sector,” but expects earnings to be in line with estimates or better. She upgraded HotJobs , which soared 3 1/16 to 15 7/8 amid otherwise negative comments.

BroadVision fell 11 1/2 to 42 1/8 after losing an American Airlines contract to rival Art Technology , which gained 9 1/4 to 103 3/4. SG Cowen said BroadVision is having trouble implementing technology with key customers, and that growth may be slowing.

Internet infrastructure plays resumed their leadership. Corning rose 11 3/8 to 259 1/2, Juniper Networks added 9 3/16 to 149 1/2, SDL gained 12 9/16 to 296 3/4, and JDS Uniphase recouped 4 1/2 to 118 1/2 on a positive mention in Barron’s. Sycamore Networks soared 14 13/16 to 125 on a contract win.

Software.com gained 8 5/16 to 125 1/8 on news of an alliance with ALLTEL .

VerticalNet rose 3 to 38 13/16 after its Necx.com unit announced it is acquiring American IC Exchange.

Some technical comments on the market: A nice day so far, the best in some time. A head fake or the beginning of a real rally? We’ll know soon enough. The Nasdaq has pushed back above 4000 and stands just 1% from 4073, where its recovery rally stalled out recently. A move above that level 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. Recent support is in the 3820-3830 range, and key support is at 3725 and 3585, which correspond roughly with the index’s 200-day moving average and October 1998 trendline, respectively, hence the importance of both of these levels. The index has b

een rising just above its 200-day moving average for five weeks. This rising resistance, rather than being a positive, could imply an inexhaustible supply of sellers; flat-line resistance is usually more bullish, as it implies that sellers will eventually be exhausted. 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 move below 700 would give the index room to 600. The Dow cleared the important level of 10,620 this morning but then turned back; a close above that number would break the trend of descending peaks in place since the index reached 11,425 in April. A move above 10,700 would break the upper boundary of the Dow’s bearish diamond pattern, and would be bullish. To the downside, the Dow has twice found support at 10,336 recently; a move below that would be the first sign that the diamond pattern may resolve to the downside, and a move below 10,200 would confirm that. We are going to reclassify the diamond pattern in the S&P 500 as a head-and-shoulders pattern, based on its repeated tests of the 1480 upper boundary. The implication is the same – a sign of a potential market top. The lower boundary of the head-and-shoulders is still around 1370, the same as the diamond pattern. A decisive break of either boundary would determine direction on that index, which turned back at 1488 recently.

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