Does Yahoo's Warning Mean the Fall Rally is Already Over?

| About: Yahoo! Inc. (YHOO)

So much for getting in before the typical Fall rally. Or, actually, maybe we already had it.

Analysts, banking on the typical seasonal run-up in the Internet sector and the market overall, just got blindsided by one of their favorite companies in the space.

Yahoo (NASDAQ:YHOO) shares tanked 12% to $25.62 Tuesday, after the company's CFO, Sue Decker, warned that sales are expected to come in at the "bottom half of the range of financials" due to weakness in the auto and financial sectors in recent weeks. This is the second time Yahoo disappointed investors since July 19. On that day, Yahoo missed second-quarter projections, issued third-quarter forecasts below expectations, and said it would delay its much anticipated ad platform. Two months ago, Yahoo said it expected Q3 sales to be between $1.1 billion and $1.2 billion in sales.

So, the question is: Is this a Yahoo-specific problem? For now, it looks like investors are saying, "It's the entire sector. Sell now, ask questions later."

On Yahoo's latest disappointing news, the entire Internet sector collapsed. Google (NASDAQ:GOOG) lost 5% to $396; eBay (NASDAQ:EBAY) gave up 4%; InterActiveCorp (IACI) lost 2%; (NASDAQ:AMZN) fell nearly 3%.

And, rightly so, to some extent. Automakers are big advertisers across the Web. Of the top 10 advertisers, three are carmakers. GM (NYSE:GM) is the No. 1 online advertiser; Ford (NYSE:F) ranks No. 7 and DaimlerChrysler (DCX) ranks No. 6. Autos account for roughly 10% of online advertising, while financials account for about 12%, according to Prudential Equity Group.

I think the Internet sector, and stocks overall, are vulnerable. The entire market has been running up, partly as falling commodity prices gave investors some reason to be more tolerant of risk. Just check out the VIX, which is a good indicator of risk sentiment.

The drop in the VIX reflects risk tolerance rising. This is to be expected, since the market usually looks forward to a Fall rally.

Unfortunately, sell-side analysts - always seeking good entry points - may have been too early in their bullish calls for such a rally. On Sept. 11, RBC issued a report on Yahoo that said that display ads were beginning their "seasonal ramp." On Sept. 14, channel checks from Jefferies & Co. revealed that Internet companies were tracking "in-line" with expectations. Yahoo, at the time, was trading at $29.

Then again, maybe the fall rally has already happened.

Here's a comment from Jay Matulich, of Septos Opportunity Fund, who was interviewed on regarding the seasonal run-up:

I think we may have already gotten it. We had a good buying opportunity that I was fortunate enough to participate in July. I liquidated substantially all my long positions around 1300 on the S&P. Everybody's expecting a late-year rally, and we may have gotten it earlier. I have to see how the market reacts to the next downdraft. I do think we’re near one, and if the market has a real problem with it, then I think we can have some pressure on us going into the year-end.

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