Waiting On Cisco
A number of analysts jumped the gun in the Cisco waiting game, creating an air of confusion going into the networking giant's earnings release. While one stock does not make a whole market, Cisco (NASDAQ:CSCO) probably comes the closest to being "the stock" of the NASDAQ. Thus, traders will be hanging on every word that CEO John Chambers has to say about the economy and about capital expenditures going forward into next year.
The pre-release flurry of upgrades and downgrades on CSCO was kicked off by a Morgan Stanley 180-degree turnaround. Morgan's Chris Stix changed his mind and upgraded the networking stock from "neutral" to "outperform" after saying just last week that CSCO was "too rich for our blood". Everybody is entitled to change their minds, but the numbers don't magically inflate in five days. Needless to say, the stock broke higher on the upgrade but settled back after investors turned neutral into Chambers' conference call.
Other brokerage houses also chimed in ahead of Cisco's earnings, but none were as positive (or silly) as the above-mentioned Stix call. Gruntal's Michael Perica cut his long-term rating on CSCO from an "outperformer" to a "market perform". Perica told clients he doesn't see a turnaround anytime soon and that the shares do not deserve a higher valuation.
As it turned out, Mr. Stix was more on the ball in upgrading CSCO than Mr. Perica was in downgrading the networker. CSCO ended up beating Wall Street estimates of $0.02/share by coming in with third quarter earnings of $0.03/share. In addition, revenues came in at $4.73 billion as opposed to estimates of $4.69 billion. However, Mr. Chamber stated that, "We are now in a valley much deeper than any of us anticipated." And we shall see what effect his conference call has on NASDAQ trading tomorrow. CSCO closed up $1.13, or 5.87%, to $20.83 in today's session.
On the economic front, we received word of a slowdown in productivity for the first quarter. The 0.1% slump in productivity was the worst reading in six years and missed expectations of a 1.2% rise in productivity. In addition, unit labor costs ratcheted higher by 5.2%. Both reports initially brought out the boo-birds, but after further review, traders shrugged off the numbers, considering that productivity is highly cyclical and that inflation is the last of our worries.
The markets pulled out the water wings today and treaded water ahead of the Cisco report. Trade, for the most part, was quiet and range bound for the second day in a row.
The NASDAQ (COMPX) managed to pull out a 25.07-point gain to end the session at 2198.64. Volume came in at 1.9 billion shares (of which CSCO did 134 million). New highs, at 129, continue to beat new lows, 24.
The DOW (INDU) pulled back today, due in large part due to the finacials. The DOW lost 51.66 to 10883.51 on the heels of a J.P. Morgan (NYSE:JPM) and American Express (NYSE:AXP) downgrade. JPM lost $1.45 to $47.75 and AXP slipped $1.93 to $41.30. Volume on the big board came in on the light side, with 990 million shares crossing the tape.
Of note is the fact that the S&P 500 is still bumping its head on resistance at 1265. Today was the seventh session that the S&P was turned back from this level. The more it tests and fails, the greater the chance of a pullback, so lets all break out the pom-poms for the S&P.
Stocks and Sectors on the Move
While the NASDAQ did carve out a small gain on the day, it didn't get any help from the hardware stocks. After Dell (NASDAQ:DELL) reported last night that it would be cutting 3,000-4,000 jobs to remain on track to meet earnings expectations, the stock pulled back today. Dell finished off $1.11 to $24.80 and took some of its competitors with it. Apple (NASDAQ:AAPL) close down $0.39 to $24.57 and Gateway (NYSE:GTW) fell $0.35 to $18.00.
Legg Mason (NYSE:LM), the big brokerage company, took a hit today after missing earnings estimates by $0.05. The firm was also downgraded by Merrill Lynch to a "neutral" from an "accumulate". LM fell $3.26 to $47.00.
Healthcare stocks, as measured by the S&P Healthcare Index (HCX.X) also seem to be catching a cold. The index appears to be struggling as a result of renewed interest in techs and improved investor psychology. A few big names in the group now appear to be on the edge of rolling over. United Health Services (NYSE:UHS) lost trend line support at $81 today, as it fell $2.29 to $80.30 on volume of 540,000 shares. Tenet Healthcare (NYSE:THC) lost $0.70 to $43.05 and Unitedhealth Group (NYSE:UNH) broke down through its 50-dma and ended the session lower by $1.69 at $59.11.
And yes, there were some sectors that finished in the green today. The most notable of these were the semiconductors, as they are directly tied to the health of the networkers and usually are the first tech stocks to bottom.
The PHLX Semiconductor Index (SOX.X) rallied 9.68 to 640.73 on the heels of small gains across many heavyweight chip stocks. Intel (NASDAQ:INTC) rose $0.32 to $31.48, Texas Instruments (NYSE:TXN) was lifted by $0.67 to $39.10 and Xilinx (NASDAQ:XLNX) added $0.83 to $45.15.
Looking Forward, Always Forward
Judging by the reaction of traders to Cisco's conference call, it might be a rough opening tomorrow. At recent check, the stock was trading down about $0.60 from its closing price of $20.36.
Individual stock news will be driving the market tomorrow, as there is no significant economic news scheduled for Wednesday. This leaves plenty of room for opening gaps and subsequent retracement moves, so be wary of any big early morning moves.
Speaking of big moves, Toys-R-Us (NYSE:TOY) wasn't playing games when it recently broke out of its long base pattern. The reason I have turned to this chart is to illustrate how market psychology has indeed changed for the better. As you can see, TOY broke out on strong volume yesterday. A few months ago, sellers would have used a breakout move like this to either get short or take profits. However nowadays, moves like this are not only attracting new buyers, but are also acting as launching pads to further gains.
So traders should be starting to get a list of strong stocks together that are currently consolidating in tight base patterns. Through the use of stop orders, you could place an order to buy these types of stocks as they emerge from their bases. The best part about these formations is the fact that should the stock turn around, the base from which it emerged ideally provides support, thereby limiting downside risk. However, downside stops should still be utilized after you initiate a new position, just in case the move proves to be false. The best place for these stops is generally just below the bottom of the base pattern.