As the markets slid Tuesday, everybody was talking "correction." On Wednesday, as the Dow recovered and the Nasdaq genuflected, everybody was talking "reallocation." In other words, investors aren't giving up on equities just yet, but they are looking for safer plays until the markets sort themselves out.
That doesn't bode well for overvalued Net stocks (is there another kind?).
TheStreet.com's Internet Sector index fell another 2.45 percent after Tuesday's 6.79 percent tumble. The Nasdaq Composite Index spent the day swinging wildly up and down, ending 0.62 percent lower. The Dow, benefiting from the reallocation, rose steadily, ending up 1.13 percent higher, at 11122.65.
The economy is continuing to grow without overheating, and there's still lots of cash out there chasing relatively few investment vehicles, so a broad equity downturn seems unlikely. But stocks that appreciated the most during the past several months of (irrational?) exuberance are getting the cold shoulder from traders.
As was the case yesterday, the drop was spurred by fears of higher interest rates, which could lead to lower corporate profits. Now that Y2K fears have been eased, analysts expect the Federal Reserve to raise interest rates by at least a quarter of a percentage point in early February and some expect a further increase early in the year.
Net stocks and certain technology issues are seeing the biggest losses as investors send money into cyclical stocks and other equities with more realistic fundamentals. So on Wednesday, we saw gains in aerospace, construction, transportation, utilities, mining and some manufacturing stocks.
Amazon provided a nice example of the market's mood. The company announced that sales in the final quarter of 1999 came in at $650 million, surpassing its sales for all of 1998. But, the company said, the higher sales likely won't translate into narrower losses when the company releases results on Feb. 2. In response, Wall Street sent Amazon shares tumbling nearly 15 percent, or $12.19, to $69.75.
Merrill Lynch's Henry Blodget continued to send mixed signals about Amazon and the Net sector as a whole. He issued a note today indicating that he remains bullish for the long term, and he is "comfortable" recommending Net stocks such as Amazon, America Online and Yahoo for the intermediate term. But he also said Amazon's fourth quarter was "strong" but "not spectacular." Investors, he added, are "likely to be disappointed based on some very aggressive expectations."
Meanwhile, Robertson Stephens' Lauren Cooks Levitan downgraded Amazon from "strong buy" to "buy," pointing to over-optimistic investor expectations.
Neither Blodget nor Levitan owned up to their part in pumping up expectations via their cheerleading for Amazon and other money-bleeding Net companies.
Traders are also bolting Internet and technology stocks, thanks to mounting fears that fourth-quarter results will be disappointing at best, or shockingly bad at worst. BMC Software on Wednesday forecast that earnings will come in at about 9 cents per share less than expectations, and its shares tumbled 36 percent, or $27.44, to $49.56.
Things could get worse on Thursday: After the closing bell, Gateway reported that it expects earnings to come in at 37 cents per share, or 7 cents below expectations. Shares had tumbled nearly 13 percent in after-hours trading.
Software retailer Beyond.com made a similar announcement, saying that although losses will come in better than expectations, revenues will fall far short of estimates. Shares fell by more than 4 percent after hours.
On the bright side, Priceline.com announced that fourth-quarter revenues will come in at about $168 million - well above expectations of about $158 million.
Priceline shares gained $5.94, or 11 percent, to close at 459.94.
Industry Standard reporter Lisa Shuchman contributed to this story.