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Internet Inference

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Of the 30 sectors I follow daily, only the CBOE Internet Index (INX) is higher at this point in today's session. While only a fractional gain, the INX's strength may be worth a closer look as it relates to the consumer and the economy.

Did last Friday's unemployment numbers scare the consumer? Not according to Safa Rashtchy, the U.S. Banc Internet analyst, who raised his revenue and earnings estimates on Yahoo (NASDAQ:YHOO) this morning. Rashtchy raised his revenue target to $173.8 million and EPS estimates to 2 cents. The consensus for the current quarter calls for Yahoo to earn $169 million in revenues and 1 cent per share in profits.

In all accuracy, Rashtchy pointed out that Yahoo is gaining market share in the online shopping space. He expects sales to grow by three percent in the current quarter. There are company specific issues at play in Yahoo as Rashtchy pointed out, but there may be a macro theme at play as well.

Other e-tailers have performed exceptionally well recently. Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) are two of the bellwethers in the group that have tracked Yahoo's price action. What's more, the recent strength in the CBOE's S&P Retail Index (RLX) confirmed the bullish behavior of the e-tailers. The RLX is lower today, but still trading near its 52-week high.

With the RLX about 40 points off of its yearly high and the recent runs in YHOO, AMZN, and EBAY, one would think that the consumer is alive and well this holiday season. Will the consumer spend enough this holiday season to propel the RLX past its 52-week high at 937? Only time will tell. But the price action of the big-three e-tailers seems to suggest another leg higher in spending.

Take Yahoo, for instance. The stock has traded higher since early November -- the beginning of the holiday shopping season -- along a pattern of relatively higher lows. Each time the stock has pulled back, the buyers stepped up to carry it to a new relative high. There's serious congestion overhead between the $20 and $23 levels. If the pattern of building demand grows, the stock could make its way up to the aforementioned range. Continued strength in the RLX would certainly add to Yahoo's momentum.

Eric Utley
Option Investor

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