Tech, Net Carnage Continues

News that Intel will need to cut costs to make its quarter sent technology and Internet stocks sharply lower on Tuesday.

The ISDEX http://www.wsrn.com/apps/ISDEX/ plunged 25 to 316, and the Nasdaq dropped 106 to 2318, just above the 2300 level where the Federal Reserve first cut interest rates on January 3. The S&P 500 lost 22 to 1278, and the Dow declined 68 to 10,730. Volume was unchanged at 1.1 billion shares on the NYSE, but declined to 1.85 billion on the Nasdaq. Decliners led 17 to 13 on the NYSE, and 25 to 13 on the Nasdaq. 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.

The Consumer Price Index for January will be reported tomorrow morning at 8:30 a.m. Eastern Time.

After the close, VA Linux missed estimates and announced 25% layoffs. Agilent topped estimates but guided future expectations lower.

Selling accelerated during the day after Intel , down 2 29/32 to 31 15/32, announced it will cut several hundred million dollars in discretionary spending, and said the next 5-6 weeks will be crucial if the company is to make its numbers.

Telecom equipment and networking stocks continued to lose ground in the wake of last week’s huge earnings warning from Nortel , down 1.13 to 18.87. Nortel suppliers Corning , down 2.45 to 30.55, and JDS Uniphase , down 1 5/8 to 34 3/16, continued to lose ground. Cisco lost 2 1/16 to 26 3/16, and Juniper declined 4 3/8 to 75 5/8. Comments from Cisco chief John Chambers over the weekend that the U.S. was already in a recession didn’t help.

Communications chip stocks were weaker on downgrades from CS First Boston. Applied Micro fell 4 15/16 to 38 7/8, PMC-Sierra dropped 5 3/4 to 46 3/4, and Broadcom lost 9 to 65 1/8.

Ariba continued to hit new 52-week lows, down another 3 7/16 to 18 1/16.

Portal Software was a rare bright spot, rising 5/8 to 9 13/16 on a contract with Vodafone.

FairMarket rose 7/16 to 2 5/16 on an agreement with eBay .

24/7 Media lost 1/8 to 1 1/16 after the company rescheduled its earnings report from February 26 to March 21 to evaluate strategic alternatives to improve its tax position and to provide investors with a more definitive outlook for the year.

Breakaway Solutions tacked on 1/32 to 1 5/32 after signing agreements for $33 million in financing and announcing plans to cut 108 jobs.

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The Nasdaq broke down out of its 1990 logarithmic trendline today, which we will peg at 2388 (first chart). The index finished below 2340, so there is enough margin of error to call it a breakdown. The break came on declining volume, a positive, but the internals, which have provided important support for the market the last two months, began to deteriorate this afternoon. New lows picked up, beating new highs by 117-78 after tracking roughly even the last two days, and decliners led by 2-to-1, not a huge advantage on a triple-digit down day, but a negative

nonetheless. So what happens now? The Nasdaq is just above the Jan. 3 Greenspan Low of 2300, so we will look for support there. If we close below the Jan. 2 close of 2291, the index could be headed for much lower lows, with the next strong support around the July 1998 highs of 2028, which would fill a big gap just under 2100 from December 1998. More Fed rate cuts could change that scenario, obviously. To the upside, we want to see the Nasdaq back above 2388 by the end of the month to avoid a monthly close below that line. Above that, the index needs to get back above its September downtrend line (second chart) at about 2450.

The S&P 500 broke back below its September downtrend line at about 1300 today and took out Friday’s lows in the process. Not a good showing from the broadest market index. 1275 is the next strong support, just a few points from here, and 1300 the first major resistance.

The Dow is back below its October uptrend line at 10,800, breaking a four-month uptrend, a negative sign for the index that has been the market’s strongest support for some time. Next strong support is 10,600-10,650, although 10,700 could provide some support. To the upside, we want to see the Dow take out 11,000 resistance; a close above 11,007 would also be bullish under Dow Theory, the oldest school of technical analysis, particularly if the Dow Transports can get back above 3000 and stay there.

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