What's Black and Blue and Down All Over?

The Net stocks. And it's not time for scavenging yet.
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Looked bad again Wednesday afternoon, didn't it? Yahoo! (YHOO) trading at 121, down from a split-adjusted 207 in January. Amazon (AMZN) - Get Report and eBay (EBAY) - Get Report both trading well under 100. Excite@Home (ATHM) - Get Report way below 50. E*Trade (EGRP) on sale for half-price, under 25. And 1-800-Flowers (FLWS) - Get Report broken, one of four IPOs that closed below their IPO offering prices. (And that one was supposed to be the hot IPO of the week!)

Even newly reliable

Exodus

(EXDS)

, which I am long, closed at 107 5/8, after a spectacular fall from grace at 146 in mid-July. (Remember mid-July? When Net stocks looked pretty good? What was that -- six months ago? A year ago? My, how time flies when you're getting killed.)

Believers to the bitter end, we prayed for an up opening today. And we got it -- for about 15 minutes. This is pain. Real, physical pain. Keep the nitro tablets close, ready to pop under your tongue.

Across the board, Net stocks have been getting whacked. Sure, the

Nasdaq

itself isn't having much fun, but plot any of these Net highfliers against the 'daq over the past month, and you'll feel their pain, fast. Heck, even

Jim Cramer

says the dot-com honeymoon is over.

So what happened?

Conventional wisdom has it that all the Net stocks were just flying too high, fat and oversold, cruising for a fall. And conventional wisdom was right, in part. You can come up with all sorts of defensive responses -- the fall in financials, the pharmaceuticals, the automakers.

To say nothing of the Nasdaq itself, down almost 10% since mid-July.

Yes, the fall in Net stock prices was in part triggered by the general market malaise. You'll have to choose your own favorite reason for that: interest-rate worries, the "August effect," hot weather -- you name it.

But the Net stocks have generally fallen faster and further than the walking wounded in financials, pharmas, autos -- and any other group. And certainly more than the Nasdaq. The seeds of that collapse were sown by Net stocks themselves. You and I just missed it, as we swooned over number-of-page-views reports and the rest of the NetNoodle stuff.

I see seven reasons that led to this not-over-yet collapse in Net stocks. Some are obvious; at least one, which I think is a very big one, is less so.

    The overall decline in e-trading. That report from Bill Burnham at Credit Suisse First Boston about the decline in the rate of growth of the number of trades handled by online brokerages didn't just hurt the online brokerage firms themselves (whose stocks have been slipping for a month). It also was a warning about the dark side of relying on daytraders, who may have seen the peak of their influence. We all know daytraders have been a big part of the price pressure that has pushed up dot-coms (and some other tech stocks) this year. Without so much daytrading frenzy in these stocks, they had to fall -- and they have.

    Interest-rate fears. 'Nuff said?

    The August effect. Sometimes market lore becomes market fact.

    The repo man calls in your bets. As Cramer said this morning, the margin clerks have been fueling a lot of the fall in Net stocks, swinging their terrible swift swords on margin positions. You've got to remember, when you trade on margin, the margin calls and those who act on them behind the scenes are a mechanical lot, unaware of and unconcerned about market realities. If it falls, you get calls.

    IPO volume. Nearly everyone has tagged this -- quite correctly -- as a force in crushing the Net stocks. Big investors, especially those at mutual funds, pension funds, etc., have only so many dollars to invest. If they stay pretty fully invested, when an appealing IPO comes along they have to dump something in the vault to buy into the IPO. This isn't a zero-sum game, but something akin to it: A slowly growing number of dollars are chasing a rapidly expanding number of stocks. Something's gotta give -- and has.

    IPO quality. It would be hard to argue that the average quality of the IPOs out so far in the second half of the year (just over five weeks!) matches the quality of those that appeared in the first half. (This is really a first-third vs. second-third argument, since the decline in IPO quality first appeared in May, but since we measure and calculate by quarters and half-years, we're pretty much stuck with January-June and Everything Since analysis.) Plot the average first-day gains of IPOs from February through June and you'll see a steady decline in typical first-day trading gains, with a sharp break from April to May. More than 70% of February Net IPOs closed up 100% or more on their opening days; by June, just 10% of Net IPOs hit that 100% first-day-gain market. Were we not watching? Did we not care?

    IPO underpricing. Here's the less-evident but nonetheless very powerful one: The market has caught on to the underwriters' tendencies to grossly underprice Net IPOs, producing dramatic first-day gains and killer net-worth numbers for insiders -- to say nothing of huge gains for the underwriters themselves, for the blocks and options they receive as part of their fees. But the companies that went public at the underpriced values left a fair amount of money on the table. And those investors who tried to ride the First Day Rocket often got killed. Remember MP3.com , which after being priced at 28 briefly hit 105 on its first day last month before falling to earth near 63 at close that day? And to around 30 today? Investors aren't fools; they know that despite the opportunities, the lowball offering-price strategy works to the disadvantage of the companies they're investing in. Consistent underpricing of IPOs has contributed mightily to the IPO-quality problem I just mentioned.

    That's it: my list of the dirty seven reasons Net stocks have fallen so far, so fast.

    Now: Is it over? No way. This slide may slow as we see these stocks slip into narrow trading ranges during August, but I don't think we've seen a definitive bottom yet. For one thing, there's no sign yet of a let-up in the flood of Net IPOs coming down the pike. (But you can bet there are a lot of nervous meetings, especially concerning high-quality IPOs in the pipeline, such as

    Red Hat's.)

    At some point before the end of the year, it'll be time for scavengers like you and me to jump back in and gobble up some of the barely walking wounded. But not yet. Too much pain remains.

    Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Exodus, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

    jseymour@thestreet.com.