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Interest rate decision reverses market rally

A sharp run-up in the major stock indexes evaporates after the Federal Reserve announces it is leaving interest rates unchanged.

A sharp run-up in the major stock indexes evaporated Wednesday after the Federal Reserve announced it is leaving interest rates unchanged.

The Nasdaq composite index had posted a gain of more than 70 points, and the Dow Jones industrial average was up more than 100 points in afternoon trading. But when the Fed announced its interest rate decision, both indexes immediately headed south. The Nasdaq, Dow and Standard & Poor's 500 quickly slipped into the red, but managed to climb back into positive territory when the closing bell was rung.

The Dow gained 26.54 to 10,707.60. The Nasdaq composite index closed up 27.22 at 3,165.49, and the S&P 500 index climbed 7.04 to 1,389.99.

While the decision to leave the federal funds rate unchanged at 6.5 percent was widely expected, many analysts had hoped the Fed would change its so-called bias from leaning toward future rate increases to a more neutral stance.

"The market was disappointed that the Fed did not change its tightening bias to neutral and said (it still) saw the risk of heightening inflation," said Scott Marcouiller, vice president and market analyst at A.G. Edwards. The Fed's "job is not to make the stock market feel good; its job is to keep the economy on track."

Despite the modest uptick Wednesday, the markets built on a solid Tuesday when the Nasdaq rose nearly 6 percent. Even so, some analysts say more selling could be on the horizon.

"Expectations for next year are too aggressive," said Bill Meehan, chief market analyst at Cantor Fitzgerald.

Meehan believes a short-selling strategy might be appropriate in these market conditions because most analysts predict earnings growth will decline over the next few quarters while many stocks remain too richly valued. Short sellers make money by betting that stocks will decline.

Among the tech stocks gaining ground Wednesday, Analog Devices rose $7.50, or about 14 percent, to $63. The maker of high-speed communications chips said it earned 54 cents per share in the fourth quarter ended Oct. 28, excluding acquisition-related costs. Analysts polled by First Call/Thomson Financial expected the company to earn 50 cents.

Sycamore Networks also reported solid earnings. The maker of optical networking equipment reported fiscal first-quarter pro forma net income of $6 million, or 2 cents a share, compared with a pro forma net loss of $4.1 million, or 2 cents a share, for the year-ago quarter. Wall Street expected Sycamore to report per-share earnings of 1 cent, excluding charges, according to analysts surveyed by First Call. Shares of Sycamore rose $4, or 6 percent, to $68.44.

The CNET tech index climbed 18.33 to 2,541.61. Advancers led decliners, with 56 of the 97 stocks in the index rising, 37 falling and four remaining unchanged.

Of the 18 sectors tracked by CNET Investor, telecom equipment companies posted the sharpest drops, falling 3 percent. Semiconductor equipment makers were the day's largest gainers, climbing 2 percent.

MP3.com agreed Tuesday to pay $53.4 million to end its copyright infringement suit with Seagram's Universal Music Group in a deal approved by a federal judge just minutes before a scheduled trial to assess damages in the case.

The accord means that MP3.com has resolved disputes with all five of the major record labels over a service that allows users to store CDs on the Net. The company's shares rose $2.19, or about 55 percent, to $6.19.

On the negative side, Network Appliance shares slipped substantially despite beating analysts' expectations for the fiscal second quarter. The Sunnyvale, Calif.-based company Tuesday reported pro forma net income of $36.6 million, or 10 cents a share, compared with pro forma net income of $16.1 million, or 5 cents a share, for the same period a year ago.

Wall Street predicted that the maker of computer data storage equipment would post earnings of 9 cents a share, the consensus estimate of 21 analysts surveyed by First Call.

Revenue increased to $260.8 million from $124.7 million a year ago, but the company's sequential revenue growth of 13 percent has declined from the previous quarter's growth of 16 percent. The shares fell $20.13, or almost 21 percent, to $76.13.

Shares of EchoStar Communications also fell after the satellite broadcasting company reported third-quarter losses of $130.9 million, or 28 cents a share, from $124.4 million, or 28 cents, in the year-earlier period. Analysts surveyed by First Call expected the company to lose 35 cents. EchoStar fell $1.44 to $34.69.

Merrill Lynch analyst Henry Blodget said Wednesday he believes the Internet advertising rut should improve by the second half of next year, as weak companies consolidate and clear winners emerge.

Among Net stocks, America Online dipped 46 cents to $49.44, while Yahoo closed down $2.31 at $57.13.