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Oversold Tech Sector Rallies Hard, but Players Retain Skepticism

David Gaffen

Perhaps the surprisingly good weather in the Northeast this weekend has folks freshly scrubbed and confident today, as all major indices at midsession were well into the green, led by buying in the technology sector.

Major Indices INDEX CHANGE % VALUE Dow 149.93 +1.5% 10,449.17 S&P 500 24.53 +1.8% 1402.55 Nasdaq 146.22 -4.6% 3351.33 Russell 2000 9.80 +2.1% 467.17 TSC Internet 37.42 +5% 789.65 NOTE CHANGE PRICE YIELD 10-Year Treasury 12/32 100 27/32 6.380%

The Nasdaq Composite Index was rallying, up 146, or 4.6%, to 3351, and the Dow Jones Industrial Average had gained 150, or 1.5%, to 10,449, while the S&P 500 was up 25, or 1.8%, or 1403. The small-cap Russell 2000 was up 10, or 2.1%, to 467.

Some expected a negative reaction from this morning's release of the Consumer Confidence Index , which rose to 144.4 in May, a four-month high after falling to a revised 137.7 reading in April. The survey demonstrates that job security and wage growth are more than offsetting the decline in stock prices in the mind of consumers, and analysts worry that the Fed may remain in attack mode in its efforts to slow the economy.

Regardless, traders say that investors are balancing those concerns against the belief that the technology sector has been wrecked enough to provide a good buying opportunity.

Big-cap tech stocks are leading the way, including the Nasdaq Stock Market's most active, Cisco (CSCO), up 2 11/16 to 57 5/8 on 24.3 million shares; Nextel Communications (NXTL), up 9.7%; and Adobe Systems (ADBE), up 9.4%.

Major technology indices were strong, including the Philadelphia Stock Exchange Semiconductor Index, gaining 6.8%, and the Nasdaq Telecommunications Index, up 6.3%. New Lehman Brothers analyst Dan Niles transferred a lot of his coverage from his old shop, Robertson Stephens, and reiterated support of computer and chip stocks overall this morning.

TheStreet.com Internet Sector index was up 37, or 5%, to 790, helped by the likes of eBay's (EBAY) 6.6% gain and a 6.3% advance in Yahoo! (YHOO).

As with all rallies, this one provokes traders to question whether it will sustain itself, especially with worries about the Fed, and the market's recent tendency to quickly give back what it has gained.

"People saw opportunities and then took them," said Randy Billhardt, co-head of block trading at PaineWebber. "Certainly, the Nasdaq had been in oversold territory, and we're seeing strength there and in the financials, but there's not a lot of oomph behind the move."

It has investors thinking that the market may be in for a week similar to last week, where a day of mostly positive action alternates with a day of dreary, ugly selling. Already, there's a couple of important economic reports in the market's way this week, including the National Association of Purchasing Management's Purchasing Managers' Index, an important survey of manufacturing sentiment, and the May employment report, due out Friday.

"People had a three-day weekend to look at prices and see some good, long-term values, and say, 'Let's go after them,'" said Allan Meyers, portfolio manager of the Kent Growth & Income Fund in Grand Rapids, Mich. "But as to whether it can hold these gains now, I'd say no. I think we still have some more churning to do."

The lack of conviction is supported by the lack of volume and some sector weakness. Strong sector advances include the commodity-related stocks, such as natural gas companies, and the brokerages, which were hosed last week after reports that Goldman Sachs (GS) may miss second quarter earnings estimates. The American Stock Exchange Broker/Dealer Index gained 2%.

The American Stock Exchange Natural Gas Index rose 1.9%, and the Philadelphia Stock Exchange Oil Service Index rose 1.3%.

The Morgan Stanley Consumer Index was lately down 0.3% in lackluster trading. Sara Lee (SLE) had risen earlier but lately was off 1/4 to 18 5/16, after announcing plans to divest Coach leather and other businesses to focus on food, beverage and household products.

The American Stock Exchange Pharmaceutical Index was down 1.1%, and the American Stock Exchange Tobacco Index lost 2.1%.

"Across the board, there appears to be some selling of the old growth companies," said Ned Riley, chief investment strategist at State Street Global Advisors. "The health care, beverage, restaurant chains are weaker in face of the estimate of Fed hikes based on the consumer confidence survey."

The Dow Jones Transportation Average was up strong, gaining 1.8%, while the Dow Jones Utilities Average was down 1%.

Market Internals

Breadth was solidly positive on modest volume.

New York Stock Exchange: 1,711 advancers, 1,066 decliners, 467 million shares. 29 new highs, 41 new lows.

Nasdaq Stock Market: 2,444 advancers, 1,329 decliners, 756 million shares. 24 new highs, 85 new lows.

For a look at stocks in the midsession news, see Midday Stocks to Watch, published separately.