Internet Stocks Await Their Fed Fate

The DOT is showing strength ahead of today's FOMC get-together.
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A brief history lesson.

The last time the

Federal Reserve

raised interest rates in June, Internet stocks rallied. On that day,

TheStreet.com Internet Sector

index closed up 20 points at 616.66, with roughly 15 of the points coming after the Fed said it was raising the funds rate by 25 basis points. In recent trading, the DOT was showing similar strength, up 4.20, or 0.7%, at 575.91 with the Fed announcement anticipated at 2:15 p.m. EDT.

But note that much of the enthusiasm after the June meeting centered on the fact that the Fed said it had adopted a neutral bias, not a tightening bias as many had expected, which gave hope that policymakers would not be embarking on an aggressive tightening cycle. But strong economic data that followed the Fed meeting drove interest rates higher and contributed to the monthlong selloff in Internet stocks. And looking back, experts suggested the market overinterpreted the Fed's decision to adopt a neutral bias.

The DOT gained 14 points on Monday, leaving some to feel there could be a "buy the rumor, sell the fact" scenario should the Fed raise rates today. However, the DOT also rallied 17 points the day before the June meeting and still had enough strength to press higher after the announcement, though again much of the gains were attributed to the neutral bias.

The most likely scenario today is the same as in June -- a 25-point hike and a neutral bias. With Net stocks on the rebound over the past two weeks, there are feelings that the sector can continue to push forward for the near term.

"They're poised to take off again," said one Internet stock trader at a major brokerage house. "If it's a neutral bias, that's great," he said.

But how long can the rally go?

Again, going back to June, Net stocks rallied for roughly a week, with the DOT trading as high as 689.16 on July 6, before going into an ugly slide that left it as low as 452.90 on Aug. 5. What is similar about the past and the present is that the Net sector is in a relatively quiet time, in between the summertime blues period and the post-Labor Day back-to-school period and still a few months shy of the holiday season. But enthusiasm for the holiday season may be coming a little early this year, particularly with Net stocks having already taken a beating.

Supply was another factor that contributed to the July Net selloff, and while there are only a small number of IPOs this week, supply could pick up in coming weeks, particularly if the market rights itself and many of the deals that were

postponed of late return to market. Lockups on many newly public Net stocks also will be coming up in the coming months, adding to the supply.

Large-cap Net stocks showed the most strength after the last Fed meeting, and most were trading higher today.

Yahoo!

(YHOO)

was up 2 7/8, or 2%, at 155;

Amazon.com

(AMZN) - Get Report

was up 4 3/8, or 4%, at 122 3/4; and

America Online

(AOL)

was up 1 5/16, or 1%, at 106 5/16. If AOL can hold gains, it would be the first time it has closed above the 100 level since July 28.

Technical analysts would like to see the DOT push through the 600 level for the rally to continue, setting up a test of the July high of 689.16. Its most recent high was 580.33 on Aug. 18.