Downward Spiral Taxes Tech Investors

Despite their recent run-ups, Internet stocks in particular are getting hit by profit-takers.
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SAN FRANCISCO -- It's been a taxing day in more than one respect for investors in the technology sector.

Though downside momentum has slowed, tech stocks remain sharply lower as traders continue to take profits and rotate money into other sectors that are perceived to have more value. The stocks that have recently seen the biggest run-ups have been hurt the most, starting with Internet stocks, many of which rallied ahead of earnings reports and are now seeing heavy profit-taking.

"We've discounted all of the good news, and they've been due to take a breather," said Jim Herrick, managing director of trading with

Robert W. Baird

.

Herrick said the market is behaving in the typical "buy-the-rumor, sell-the-fact" fashion, which comes into style around earnings time. And the problem has been compounded by daytraders and speculators who were expecting positive earnings to fuel further gains, Herrick said. When those gains failed to materialize, these traders ditched the stocks en masse, creating the large swing. He said the sector needs another dose of fresh news, like a merger or alliance, or a big upside surprise in an earnings report to stem the tide.

The pattern of buying before earnings reports and selling afterward is not lost on one daytrader. "It fits the seasonal pattern where you see a sharp run-up in stocks heading into the earnings-season period, and then you see profit-taking, which trims anywhere from a third to 50% of the run-up off the stocks," the daytrader said.

The daytrader is staying out of the market during this period, saying, "you don't want to catch a falling knife."

Ameritrade

(AMTD) - Get Report

is an example of a stock that follows this seasonal pattern. Ameritrade was trading at 62 9/16 April 1 before predictions of a strong quarter for online brokers. The stock had risen to 188 3/8 Wednesday before profit-takers emerged. It was down 17 9/16, or 12%, at 130 7/16 today. Some investors may be disappointed that the company did not announce a stock split with its earnings report. The company did say it was considering a secondary offering to finance technology spending.

Other online brokerages are suffering as well.

National Discount Brokers

(NDB)

was down 12 5/8, or 20%, at 51 7/8.

E*Trade

(EGRP)

was down 18 3/8, or 16%, at 94 1/2.

Profit-takers also are hitting stocks like

CMGI

(CMGI)

and

RealNetworks

(RNWK) - Get Report

, which have been on fire for most of the month. CMGI was trading at 181 April 1, rose to 293 Tuesday, but fell 40 points Wednesday. It was recently trading down 19 1/8, or 7.5%, at 236. RealNetworks was a 130 stock April 1 and had doubled to 263 by April 13. After sliding nearly 40 points Wednesday, it was lately down another 25 9/16, or 13.5%, at 163 15/16.

Also among the big losers is

Inktomi

(INKT)

. The company reports

earnings after the close, and traders apparently don't want to be left holding the bag. It was down 22 3/4, or 17%, at 114 1/4. And

CNet

(CNET) - Get Report

, which went from 90 to 159 1/2 in little more than a week, was down 15, or 12%, at 113 this afternoon.