Net Stocks Cower as Bond Yields Soar

Bonds tanked today, keeping the interest-rate sensitive Net sector in the red. E*Trade and Ameritrade were hit hard by a Lehman downgrade.
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Get used to it. Wild mood swings, that is.

Internet stocks fell along with the Treasury market, while a shot from

Fed

Chairman

Alan Greenspan

also set the sector on its heels.

TheStreet.com Internet Sector

index closed down 2.46, or 0.4%, at 573.99. For the week, the DOT was up 16.82 points.

Internet stocks appeared ready to bust out following Tuesday's interest-rate hike by the Federal Reserve. Feelings were that the Fed's tightening cycle could be over and prospects for a strong fourth quarter had investors interested again. But after a post-Fed rally, bond yields began to climb on Thursday and continued their ascent today.

In addition, the Net sector ran into some technical problems on Thursday that encouraged traders to take some profits. The DOT was seen as overbought, and saw sellers emerge as it hit a key technical level at 600

Thursday.

Drew Cupps, portfolio manager for the

Strong Enterprise Fund

, said he expects the volatility in the Net sector to persist for the near term.

"There's going to be days where they relax and think about Christmas, and there's going to be jittery days when they think about interest rates," Cupps said.

Not helping, Cupps said, was the short-term investor getting in and out of stocks, adding to back-and-forth trade. Like many other sector watchers, Cupps said he would be buying stocks that have the best chance to make money, which includes some of the big-cap names. His picks include

eBay

(EBAY) - Get Report

, and two Internet software management plays,

BroadVision

(BVSN) - Get Report

and

Vignette

(VIGN)

.

And while Cupps admitted that buying the big names in the sector is somewhat of a popular play, he claimed it made sense because there was a good chance those companies will eventually dominate their spaces.

"The Internet is more of a winner-take-all marketplace and if the business models can hold up, there's tremendous rewards," he said.

Those rewards are expected to be seen more prominently in the fourth quarter, when a strong holiday season is expected for many Internet companies. But Cupps said it's not too early to be thinking about Christmas.

"The thing to remember with the stock market is that it is a forward-looking vehicle," he said. "If people are thinking about Christmas in October, then they'll start to think about it in September. Pretty soon they're thinking about it today."

Treasuries were weak all day today and prevented any meaningful comeback among Net stocks. Treasury bond futures closed at session lows and losses in the cash market continued after the futures market closed at 3 p.m. EDT.

Net bellwethers told the story for the sector.

Yahoo!

(YHOO)

closed down 3 11/16, or 2.4%, at 149;

eBay

(EBAY) - Get Report

closed down 1 3/16, or 1%, at 127 1/4; and

America Online

(AOL)

slipped back below the 100 level, closing down 1 5/16, or 1%, at 99 1/8.

Online brokerages were slammed after

Lehman Brothers

downgraded

Ameritrade

(AMTD) - Get Report

and

E*Trade

(EGRP)

to outperform from buy. Analyst Richard Repetto noted that increased competition and high cost per account were factors for the downgrade.

TheStreet.com e-Finance

index closed down 2 29/32, or 4.3%, at 64 29/32. E*Trade closed down 1 13/16, or 6.5%, at 25 15/16 and Ameritrade closed off 1 7/16, or 6%, at 21 5/16.

Among the winners was

bamboo.com

(BAMB)

, which rallied in its second day of trading. The online provider of virtual real estate tours closed up 5 13/16, or 33%, at 23 3/8. And

Phone.com

(PHCM)

concluded a wildly successful week, closing up 9 1/2, or 8%, at 124 1/2.