Cisco Leads An Oversold Bounce

Was there any “news” in Cisco’s news last night? We’ll let you decide.

Here’s the quote from Cisco CEO John Chambers that appeared in a press release last night that sent telecom equipment stocks surging after hours:

“… we are beginning to see signs that our business is stabilizing. Although we can’t predict the future, our orders for the first weeks of this quarter are in line with the expectations we discussed in our fourth quarter earnings call.”

And here’s our summary of that guidance from earlier this month:

“CEO John Chambers said there are some signs that the U.S. market is stabilizing, particularly in the enterprise segment, but that the U.S. service provider market and Europe and Asia remain weak. He said a bottom in the U.S. is possible in the next 1-2 quarters, but that European and Asian weakness could cause another leg down in the U.S. market.”

It seems that the first line of the two is the same, and the only difference is that the second goes into greater detail. And don’t forget that the expectations that the company is meeting so far this quarter are lowered expectations.

It’s a funny market.

There are a few things going on here, we think. As we pointed out in Tuesday’s Market Close, the market was oversold enough to bounce. When the market is overbought, good or neutral news can be viewed as bad news, and when it is oversold, bad or neutral news can become good news. This is neutral news: Cisco’s outlook shouldn’t change over the course of 16 days, or something’s really wrong.

Second, market sentiment remains too bullish. As we pointed out last night, the CBOE put-call ratio hit a level yesterday morning normally associated with short-term tops. The only fear in this market is the fear of missing a big rally. But until that bullish sentiment is washed out a little, it’s going to be tough for the market to make much headway. This has been the case all the way down from the May 22 top. In case no one’s noticed, the Nasdaq has fallen more than 20% since then, a bear market in its own right. Why that hasn’t caused more than an occasional spike in fear is mind-boggling.

And third, what if buried under the “news” – of a reorganization and the company’s quarter still being on target after 16 days – was the real news? Kevin Kennedy, a key Cisco official, is leaving. As we said, oversold markets can turn neutral – or bad – news into good news.

And finally, where’s the Dow? Dow futures are up about 0.3% this morning. The Nasdaq futures are up more than 1%. A rally that isn’t broad-based doesn’t stand much chance of being sustained over the long run.

And then there’s the little problem of Cisco’s valuation. As of yesterday’s close, it was trading at 80 times the next 12 months’ earnings estimates. A stock with a PE of 80 and long-term projected growth of about 20% will very likely be a poor investment over the long run. At a PE of about 30, former high-flyer Juniper Networks is suddenly looking more appealing, a long way down from a PE of 1200 at its peak, when it traded at $240 a share.

Cisco’s technical picture looks like it was due for a bounce, finding support at a trendline just under 16 yesterday and then reversing to clear a sharp downtrend line (see chart below). At this point, the stock will likely face no real resistance until 17.95, the 50-day moving average. If it can clear 18 with style, we can’t find another resistance until just under 20. But if it breaks that lower trendline at about 15.50, 11-13 would become the likely target.