Publish date:

Net Stocks Brace for More Turbulence

There are few signs that the slump in Internet shares is over.

SAN FRANCISCO -- Investors in the Internet sector who may be straining to hear the hoofbeats of the cavalry can just keep waiting. There's no rescue brigade for these stocks in sight, analysts and traders say.

Even after a rebound Friday, it was a grim week for Internet stocks. The

TheStreet.com Internet Sector

index closed the week down 7% at 580.6 after falling as low as 522.7 on Wednesday. The broader

Nasdaq Composite

index, by comparison, closed down 2% on the week. The selloff last week, following others since mid-April, has left the Internet sector

leaders between 30% and 50% off from the lofty highs they saw in April.

AOL's

(AOL)

close Friday of 119 3/4 is 32% down from its peak of 175 1/2 on April 6.

Yahoo!

(YHOO)

ended the week at 148, down 40% from its record high of 248, also on April 6. And

Amazon.com

(AMZN) - Get Amazon.com, Inc. Report

finished at 118 3/4, down 46% from its April 27 high of 221 1/4.

A number of explanations have been advanced to explain the dramatic tumble in stocks that seemed unstoppable only a couple of months ago: Post-earnings profit taking,

slowing traffic at top Web sites, expectations of higher interest rates and a

glut of Internet IPOs are the most common.

"The supply of Internet stocks keeps increasing and there's only a finite amount of money chasing after a larger and larger number of stocks," says Dan Mathisson, head stock trader with

D.E. Shaw Securities

.

TheStreet Recommends

Don't look for a reprieve this week. With few earnings reports coming until early July, there'll be little news to give the sector direction. Instead, it's likely to be influenced by the broader market. On Thursday, for example, the

Dow

tumbled on fears of rising interest rates, and Internet stocks followed. This week, reports on employment and purchasing among manufacturers should give a clearer indication of whether the

Fed

will boost rates this summer.

Net stocks had been viewed as a safe haven from interest rate concerns. Many Internet investors had been rationalizing high valuations by looking at growth and profits several years down the road. Suddenly, however, Net stocks don't look like a shelter after all.

This week, the IPO market will cool off a bit with only six deals scheduled. Highlighting the Internet offerings is

Wit Capital

, the brokerage firm and Internet investment bank. Also on tap are

Litronic

, an Internet data security product reseller and

USA.Net

, an email services outsourcer.

Some die-hard bulls, such as

BancBoston Robertson Stephens

analyst Keith Benjamin, continue to see room for hope.

"In our view, many investors appear to have given up after recent declines, demonstrating capitulation that typically defines the bottom," Benjamin wrote in a note last week. "Because so many people appear to be scrambling to accurately forecast the bottom, we believe the actual day may happen sooner than the majority expects."

Even if the Net sector recovers this week, investors still must confront an even bigger beast: the summer doldrums. "We believe the sector could stay choppy during the summer, as some seasonal usage trends could start affecting the industry,"

PaineWebber

Internet analyst James Preissler wrote in a note.

"As the summer winds down and users and company managements return home from vacations, we expect usage and news flow from companies to pick up and stock prices could follow," Preissler wrote.

It seems that, for Net stocks, this could be a long, hot summer indeed.