Net Stocks Take a 3% Hit as Amazon Gets Cut Down to Size

A 6% drop in the online bookseller leads an uninspired session for Net stocks.
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SAN FRANCISCO -- Traders took advantage of a brief early rally to sell Internet stocks, as the sector continued to reel from interest-rate concerns and summer doldrums.

TheStreet.com Internet Sector

index closed down 16.06, or 2.9%, at 540.03. Light volume in

Nasdaq

trading seemingly portended a short-covering bounce in Net stocks, but little fresh buying ensued. The index traded as high as 573.46 following a friendly

National Association of Purchasing Management

report before sellers emerged.

Youssef Squali, Internet analyst with

Ladenburg Thalmann

, said that even though some of the interest-rate concerns from last week were abated today, the sector continues to be hurt by the prospect of higher rates, a fear that could persist through the month. The

Federal Open Market Committee

will consider whether to raise rates at its meeting Aug. 24. The

Fed

will see a key piece of data Friday with the July employment report, and the report could determine which direction the market will expect the Fed to lean.

Squali also said that he sees "no substantial catalysts" in August that will drive the sector higher. Like other analysts, he sees things picking up in the late fall as children go back to school and e-tailing interest picks up. Squali said he is advising those investors who are looking to get into the sector to begin "nibbling," with the understanding that things may still weaken further this month. Those who already own Net stocks should "just sit tight and ride this wave of pessimism," he said. Squali noted that his advice caters more to longer-term investors than to short-term traders.

Pessimism continues to follow

Amazon.com

(AMZN) - Get Report

.

Barron's

again took the company to task, this time over declines in revenue per customer. Following the article,

Merrill Lynch

analyst Henry Blodget came to the defense of Amazon, saying he expects a strong holiday season will lift the stock by the end of the year. But Blodget noted that for Amazon to hit aggressive forecasts, revenue per customer must start increasing within 12-18 months. Amazon closed down 6 1/16, or 6%, at 94.

Also weighing on the sector was further weakness in

America Online

(AOL)

, which closed down 2 3/8, or 2.5%, at 92 3/4, as buying dried up when the stock reached a high of 98 1/4.

eBay

(EBAY) - Get Report

was another Net bellwether to suffer, closing down 6 7/16, or 6.6%, at 91 1/4.

The negative mood in the sector and prospects for additional supply also took their toll on a couple of recent IPOs.

Phone.com

(PHCM)

closed down 9 11/16, or 16%, at 52 1/2, while

drugstore.com

(DSCM)

closed off 5 9/16, or 11%, at 44 13/16. Many of the 31 IPOs scheduled to go public this week are Internet-related.

TSC's

Ben Holmes provides

insight on the deals scheduled to go off this week.

Among the day's winners were

Redback Networks

(RBAK)

, up 10 7/32, or 6.6%, at 164 31/32, and

China.com

(CHINA)

, up 4 3/4, or 15%, at 37.