Selling Into Strength Still the Trend on the Net

Big Net names continued to flounder even as blue-chips put in a solid rally.
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SAN FRANCISCO -- A modest bounce in the Internet sector following this morning's soft economic data tapered off around midsession as traders continue to sell into any strength in Net stocks.

TheStreet.com Internet Sector

index was up a scant 1.05, or 0.2%, at 557.14 after hitting 573.46 about an hour after this morning's

National Association of Purchasing Management

report. Treasuries bounced back after the report showed some moderation in the manufacturing sector. Note the Treasury market still has another key report to deal with Friday, when the employment report for July will be released.

But the sector was unable to extend the recent gains, perhaps the result of a short-covering bounce and an absense of follow-through buying. Traders remain unsettled by recent weakness and some are taking advantage of the strength to get out of positions, something

TSC's

James Cramer

discussed in a

piece today.

Lack of a sustained recovery in both

Amazon.com

(AMZN) - Get Report

and

America Online

(AOL)

were also contributing to the setback. Amazon has been hurt by yet another negative piece in

Barron's

this weekend, with focus on a decline in revenue per customer. The stock recently was trading down 1 11/16, or 2%, at 98 3/8 after trading as high as 102 1/8.

AOL was up 1/4 at 95 3/8 after trading as high as 98 1/4. AOL also was the subject of a negative story in

The-Adviser.com

, which took issue with the company's valuation. Last week, The-Adviser.com wrote a story that suggested that

AT&T

(T) - Get Report

was about to launch a price war with America Online, which contributed to

weakness in AOL's stock. The-Adviser.com states in another story that it has a neutral position on AOL.

According to Drew Cupps, portfolio manager for the $82 million

Strong

(SENTX)

Enterprise fund, concern over interest rates drove him to pare his holdings in Internet stocks over the past three months. Cupps said Internet stocks composed about 25% of his fund's portfolio, but now make up around 10% to 12%. He said that during times of rising interest rates he would rather not be in companies that have high multiples and little in the way of earnings, as most Net stocks do. He said he is more interested in other sectors, such as semiconductors, whose earnings should benefit from the current strength in the economy.

Cupps said he has no timetable for jumping back in to the Net sector, preferring to do so when economic growth slows down. But he is not buying into the theory espoused by many market analysts that the fourth quarter is going to be a blockbuster for Net stocks due to the onset of the holiday season and as consumers return from vacation and children go back to school.

"It's not the reason to buy," said Crupps. "It's certainly a reason to be interested, but it's not something that I know that you don't know. It's not proprietary information."