Yahoo Issues Major Earnings Warning

Yahoo plunged 20% in after hours trading on Wednesday after the company met earnings estimates, but issued a major profit warning for the rest of the year.

During the day, traders shook off comments by Cisco Systems that a slowdown in capital expenditures was hurting the company to send technology and Internet stocks higher.

The ISDEX http://www.wsrn.com/apps/ISDEX/ soared 22 to 358, and the Nasdaq surged 82 to 2524. The S&P 500 rose 12 to 1313, and the Dow added 31 to 10,604. Volume rose to 1.3 billion shares on the NYSE and 2.5 billion on the Nasdaq. Advancers led by 18 to 10 on the NYSE, and 25 to 12 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.

Yahoo plunged 6 points to 24 1/2 after meeting earnings estimates of 13 cents a share. Revenues for the quarter came in $4 million light at $311 million. But the company’s outlook for the year was what really caught analysts by surprise: Yahoo said full-year earnings will come in at 33-43 cents a share due to economic weakness, well under analysts’ 57-cent estimate. The company also guided full-year revenues down to $1.2-$1.3 billion from estimates of $1.4 billion.

During the day, Cisco lost 1 1/4 to 35 7/8 after CEO John Chambers admitted at a Morgan Stanley conference that the CapEx spending slowdown began to affect the company’s business in mid-December, and that the company has less visibility than usual. Morgan Stanley and CIBC made negative comments on the stock. Morgan said the company’s earnings could be impacted by 2 cents a share this year and 10 cents a share next year. CIBC said Cisco no longer has an appreciating stock price with which to make acquisitions, a big part of the company’s strategy. Juniper Networks shook off weakness to rise 1 7/16 to 118 5/8.

Broadcom , a Cisco supplier, shook off the Cisco news to close up 13 3/16 to 110 3/16. Broadcom is also a big supplier to Motorola , which met earnings estimates after the bell.

eBay surged 5 15/16 to 39 5/16 on a positive presentation by CEO Meg Whitman at the Morgan Stanley conference. But the stock fell back to 36 after hours in sympathy with Yahoo.

Interwoven surged 4 3/4 to 25 3/4 on a Wit SoundView Strong Buy rating. PurchasePro tacked on 1/2 to 15 3/4 on an ABN Amro Buy rating.

Priceline.com added 5/16 to 2 1/8 on news of a settlement with Expedia .

barnesandnoble.com slipped 9/32 to 2 1/8 on an earnings warning. ServiceWare plunged 1 13/16 to 1 5/8 on an earnings warning.

Evoke , off 1/8 to 1 5/8, preannounced better than expected results and announced a restructuring.

i2 Technologies , up 6 3/16 to 47 7/8, finally got a bounce after preannouncing better than expected revenues. Ariba rose 2 15/16 to 39 7/8, and Commerce One surged 2 1/2 to 22.

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A very strong day in the market; we’ll have to wait until tomorrow to see if traders can take Yahoo’s earnings warning in stride

. So far, the Nasdaq futures are only down about 20 points, a good sign. As we’ve said before, bottoms occur not when the fundamentals improve, but when investors become psychologically inoculated against further bad news. We believe that is occurring here. The Nasdaq filled its gap from yesterday at 2396 this morning before turning up, backing and filling action that remains constructive. The index closed the day at 2524, just above the early December 2523 bottom, another plus. Now with earnings season about to hit, we should get a better sense of near-term market direction. Yesterday’s action gave the index upside potential to 2650. The Nasdaq and Nasdaq 100 remain in the middle of new rising channels:

The S&P 100 is forming a strong lower support line here (first chart), while the S&P 500 is forming a large trading range between 1277 and 1350 (second chart). The S&P 500 may be forming a small ascending triangle that could carry it to about 1345. A clean break of 1350 could carry the S&P all the way to 1420.

The ISDEX is also setting up a wide trading range, between 300 and 385. A break of 385 could carry the Nets to 470.

The Dow is looking weaker than the Nasdaq and S&P here, but it managed to get back to the level where the Fed cut interest rates (10,600), a level that was previously strong support on the index. The Dow retraced to the neckline (10,500) of an inverse head-and-shoulders bottom today; as we said at midday, the Dow looked like it was trying to turn up there, and it did. Critical support on the Dow is 10,300, while a close above 11,007 would confirm a new bull market under Dow Theory.

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