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Early Cisco-induced tech rally fizzles

A rally in tech stocks sparked by a solid earnings report from Cisco Systems fizzles as investors once again grow cautious.

An early rally in tech stocks today that was sparked by a solid earnings report from Cisco Systems fizzled as investors once again grew cautious.

Up nearly 100 points in early trading, the Nasdaq composite index finished up only 4.95 at 3,853.50; the Standard & Poor's 500 index dropped 9.94 to 1,472.87.

The Dow Jones industrial average fell 71.06 to close at 10,905.83, led by Wal-Mart, which fell $4.63 to $53.

Network equipment maker Cisco yesterday reported fourth-quarter earnings of $1.2 billion, or 16 cents per share, compared with earnings of $710 million, or 10 cents per share, during the same period last year. Analysts expected Cisco to earn 15 cents a share, according to a survey by First Call/Thomson Financial.

Shares of Cisco climbed $2.31 to $67.81. Volume topped 89 million shares, more than twice the stock's average daily volume and making it the most actively traded stock on the Nasdaq.

"The Cisco news was powerful enough to push overseas markets and futures higher" before the U.S. markets opened, said Bill Meehan, chief market analyst at Cantor Fitzgerald.

Some analysts noted that the Nasdaq's inability to sustain the early surge could be a sign that the techs are not ready to emerge from their summer doldrums.

"The pullback is almost disconcerting if you're bullish on tech," said Meehan, who advised his clients that the Cisco report and the company's outlook for the second half of the year would be more important than the strong economic productivity numbers that came out yesterday.

"Everybody was waiting for something to provide a catalyst to push the technology sector through its current levels," Meehan said. "The earnings and conference call were very positive. If you can't hold a gain on that, you can be sure that some people will look to sell heavily."

Said Jeff Logsdon, director of research at WR Hambrecht: "While the Cisco numbers were impressive and gave momentum investors a reason to be enthusiastic, it didn't generate the enthusiasm needed for investors to commit large amounts of capital."

Since the beginning of May, the technology-heavy Nasdaq has remained mostly between 3,700 and 4,000, although it fell as low as 3,205.11 on May 26 and traded as high as 4,274.18 on July 17.

Bob Gasser, head of U.S. equity trading at J.P. Morgan, noted that investors' reaction was typical for a summer day when the markets are particularly anemic. "I don't think the markets will trade down (this month)," said Gasser, "but you won't see a rally until people get back from vacation."

Added Logsdon: "I think institutional investors are tired. They were up 25 to 50 percent in the first quarter, and they lost most if not all of that. They've been whipsawed."

At the end of regular trading, Intel closed up $1.94 at $63.56. Microsoft inched up 13 cents to $74.25.

Of the 18 sectors tracked by CNET Investor, semiconductor equipment companies posted the strong gains, rising about 2 percent. Internet services companies were the day's largest losers, sliding almost 3 percent.

Shares of wireless Internet software provider Phone.com and Web messaging software maker Software.com jumped after the companies announced that they have agreed to merge in a stock deal worth roughly $6.4 billion.

Phone.com rose $13.06, or about 17 percent, to $91.13, while Software.com gained $34.69, or 32 percent, to $142.44.

The initial offering of McData, a maker of switches and software, was the largest percentage gainer on the Nasdaq. The shares rose $57.56, or nearly 206 percent, to $85.56.

Among members of the CNET tech index, Amazon.com took another hit. Shares of the e-tail giant fell $2.06 to $30.88 after an influential investment research firm, Sanford C. Bernstein, initiated coverage on the stock by giving the company its first "underperform" rating.

Verizon Communications shares fell for a second day after the biggest U.S. local-phone company said 2000 earnings will be lower than analyst estimates. The shares dropped $2 to $40.50.

Chip stocks had a solid day. The Philadelphia semiconductor index rose 12.99 to 963.77, led by chipmaker National Semiconductor, which rose $2.06 to close at $35.31. Cypress Semiconductor rose $3.06 to $35.56, while Vitesse Semiconductor climbed $9.38, or 15 percent, to $70.31.