SAN FRANCISCO -- Think the wrenching drama of the Internet sector is over? There are still indications that Wednesday's rebound is just an intermission and that the tragic finale has yet to unfold.
After four days of declines that stripped 15% off the
TheStreet.com Internet Sector
index, the index bounced back 3% Wednesday. But it's 29% below its high on April 13, which is still deep in bear territory.
Some observers have pointed out that we've seen this volatility before. It's not uncommon for Net stocks to fall back between 20% and 40% as they catch their breath for another surge upward. And like similar tumbles in September, late November and January, there are plenty of explanations: data showing a decline in traffic on the biggest Web sites, persistent concerns about Net stock values, expectations of higher interest rates and a glut of Internet IPOs.
But there's one key difference between those corrections and this movement down: The big names like
are leading the losses.
It used to be that these stocks, the so-called Internet blue-chips, acted as a support system. In late November, for example, when the TSC Internet index fell 27%, Yahoo! lost only 16% and Amazon lost 14%. Now, Yahoo! is down 42% and Amazon down 47% from their respective highs in April. The DOT? It's down just 18%. That means the most sought-after, most widely held and most respected of Internet companies are getting hit hardest.
Some analysts, such as Mike Tucker at
Federated Investment Management
, see a fundamental shift in the mentality of the small investor, who was largely responsible for the furious rally in Net stocks during the past year. Earlier, when the Internet sector turned sour, investors would go back to the few names they knew and trusted. This time, investors have more stocks to choose from because of
a flood of IPOs. Of the 153 Internet IPOs in the 1990s, 53 have gone public in the past six months alone, according to
Thomson Financial Securities Data
Meanwhile, at the Oasis
Another drain on liquidity in the Net sector is coming from mutual funds. Expectations of higher interest rates have put a drain on inflows into stock funds. Last week, net inflows into U.S. equity funds slowed to $2.5 billion, the lowest level in five weeks, according to
Liquidity Trim Tabs
. "If less is going into equities, it affects all equities," says William Schaff, chief investment officer for
Bay Isle Financial
and manager of its Information Tech 100 fund, which is long AOL.
Technology funds have been among the hardest hit. In the past five days, aggressive growth funds -- which include most tech funds -- saw $400 million flow out. As investors redeem their money, the fund managers are often forced to sell shares to pay them out. And many tech funds tend to hold their biggest positions in the large-cap Internet stocks such as Yahoo! and AOL.
Add to that the concerns surrounding Amazon's
aggressive spending , AOL's
vague plans and Yahoo!'s stagnant traffic. Given those issues, investors have reason to steer clear, says Tucker. Federated holds these three stocks in its three growth funds.
While there are signs that this Net slump could continue, most interviewed were holding out hope of a rebound. "Nothing goes up forever," says Jeffrey Bunch, president of
LVS Capital Management
, which holds shares of AOL, Amazon and Yahoo!, "and they won't go down forever."
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