Net Issues Start Week With Strength

Following the pattern exhibited before the last Fed meeting on June 30, Internet stocks shifted into rally mode this morning.
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"Don't fight the Fed" is a common mantra on Wall Street, but since when has the Internet sector done anything that's common?

A day ahead of the

Federal Open Market Committee

meeting, Net stocks were in rally mode. The sector was benefiting from the ongoing feeling that the worst is behind it and from expectations for a strong fourth quarter.

TheStreet.com Internet Sector

index was up 14.07, or 2.5%, at 571.24 early this morning.

Net stocks rallied into the last Fed meeting on June 30 and continued to show strength until roughly a week after the meeting, when the sector entered into a one-month tailspin. The DOT peaked at 689.16 on July 6 before dropping more than 200 points to as low as 452.90 on Aug. 5.

Things should be a little different this time around. While the sector must get past what's expected to be a slow period in late August and September, hopes for increased Internet usage in the fourth-quarter holiday season have encouraged investors to return to the sector. And though Net stocks have been extremely susceptible to prospects for higher interest rates, the anticipated 25-basis point hike in the fed funds rate Tuesday could be the last hike for the year. However, supply, in the form of both initial public offerings and lockup expirations, could continue to be a factor.

In early trading,

Stamps.com

(STMP) - Get Report

was up 5 3/8, or 18%, at 36. The company said that it had entered into an agreement with

Microsoft

(MSFT) - Get Report

to offer Internet postage through the Microsoft Office Update Web site. Microsoft was up 1 3/8, or 2%, at 84 3/4.

EMusic.com

(EMUS)

, which sells downloadable music on the Internet, said it was entering into an agreement with

Yahoo!

(YHOO)

to offer downloadable music on Yahoo! Digital, a new multimedia site launched today. EMusic.com was up 1 1/4, or 8%, at 17 3/8. Yahoo! was up 4 1/2, or 3%, at 149 1/2.

Donaldson Lufkin & Jenrette

initiated coverage of

drugstore.com

(DSCM)

this morning with a buy rating. On Friday, the company said that founder Jed Smith was leaving the company to pursue a new venture and that Melinda French Gates, wife of Microsoft head Bill Gates, was appointed as a director of the company.

Shares of

eBay

(EBAY) - Get Report

were up 5, or 4%, at 128. The online auctioneer said that it was revising recently announced changes to its reserve auctions. Instead of charging $1 for each reserve auction, eBay said it will charge 50 cents on auctions with reserves less than $25 and $1 for auctions with reserves of $25 or more. A reserve auction is one in which the seller sets a minimum sale price for the auction item.

Also among Net bellwethers,

America Online

(AOL)

was up 1 3/8, or 1%, at 96 9/16. CEO Steve Case said in a recent German magazine interview that the company planned to launch a television channel called

AOL-TV

. Case reportedly told Germany's

Focus

that AOL planned to offer email and chat-room services over the channel. In separate news, Chief Technology Officer Marc Andreessen has filed with the

Securities and Exchange Commission

to sell 940,680 common shares of stock, valued at around $88 million.

Finally, Internet service provider

PSINet

(PSIX)

was trading higher after it said it was buying

Transaction Network Services

(TNI)

, a provider of e-commerce data communications, in a deal valued at $720 million. PSINet was up 3 3/16, or 7%, at 48 3/4. Transaction Network Services was not trading early on.