Stocks Party, But Nets Stay Home

Stocks cheered signs of slowing in a weaker-than-expected June employment report, but Internet stocks missed out on the celebration after a downgrade to Yahoo.

The ISDEX lost 4 to 738. But broader indexes soared. The Nasdaq gained 62 to 4023, back above the important 4000 level. The Dow soared 154 to 10,635, its biggest one-day gain since late May, and the S&P 500 rose 22 to 1478. Volume fell slightly on the NYSE to 932 million shares, and was unchanged on the Nasdaq at 1.47 billion shares. Advancing issues led 18 to 10 on the Big Board and 20 to 18 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. The Producer Price Index for June will come out July 14.

Yahoo fell 5 5/8 to 116 3/4, hit by a downgrade to Buy from Strong Buy by Deutsche Banc Alex. Brown analyst Andrea Williams Rice, 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. However, other analysts pointed out that leading tech stocks trade at PEs of 50 or higher.

Goldman Sachs reiterated Recommended List on Yahoo. Robertson Stephens said it is expecting declining advertising to hurt second-tier portals, but that it expects Yahoo and AOL to “remain largely unaffected.” Key support on Yahoo is around 111. eBay fell 1 1/4 to 49 3/4, just below key support at 50.

Rice also downgraded FairMarket , off 55/64 to 5 5/16, Safeguard Scientific , down 1 15/16 to 30 1/2, and TMP Worldwide , off 2 15/16 to 73. She said other stocks vulnerable to slower revenue growth are About.com , off 1 1/8 to 30, Lycos , up 1/16 to 49 5/16, and AOL , up 1/2 to 56 5/8. Rice said that earnings season “could bring more bad news for the sector,” but expects earnings for the stocks she follows to be in line with estimates or better. She upgraded HotJobs , which soared 2 31/32 to 15 25/32 amid otherwise negative comments.

BroadVision plummeted 13 1/16 to 40 9/16 after losing an American Airlines contract to rival Art Technology , which soared 19 to 113 1/2. SG Cowen said BroadVision is having trouble implementing technology with key customers, and that growth may be slowing. Interwoven , which also won a contract from American Airlines, soared 11 1/4 to 131.

Internet infrastructure plays resumed their leadership. Corning rose 8 9/16 to 256 11/16, Juniper Networks added 7 11/16 to 148, SDL gained 10 1/16 to 294 1/2, and JDS Uniphase recouped 2 1/4 to 116 1/4 on a positive mention in Barron’s. Sycamore Networks soared 16 3/16 to 126 3/8 on a $420 million multi-year contract win from 360 Networks and a CS First Boston Buy rating.

Software.com fell 1 9/16 to 115 after trading as high as 126 on news of an alliance with ALLTEL .

VerticalNet rose 2 3/16t

o 38 after its Necx.com unit announced it is acquiring American IC Exchange.

audiohighway.com soared 1 3/32 to 3 1/8 on news of an alliance with Warner Music Group.

Some technical comments on the market: A very nice day for the broader market, the best in some time. A head fake or the beginning of a real rally? We’ll know soon enough, as the Nasdaq, Dow and S&P 500 are all just below key levels. The Nasdaq has pushed back above 4000 and stands a little more than 1% from 4073, where its recovery rally stalled out recently. The index turned back just above 4050 today. A move above 4073 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. Also, there is a gap down from 4188 to 4094 from April 11, adding to the resistance in this area. Recent support on the Nasdaq 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 been 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). Weakness in leading issues like Yahoo and eBay is a negative. A move above 790 would be bullish, while a move below 700 would give the ISDEX room to 600. The Dow cleared the important level of 10,620 this morning, breaking 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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