Stocks Fall Despite Cisco Earnings

Better-than-expected earnings from Cisco Systems couldn’t save stocks on Wednesday, as weakness in drug stocks and retailers dragged the broader market lower. The Nasdaq finished the day up only slightly after being up more than 2%.

The ISDEX fell 9 to 742. The Nasdaq rose 4 to 3853, but more than 80 points off its high. The S&P 500 lost 9 to 1473, and the Dow fell 71 to 10,905. Volume rose to 1.05 billion shares on the NYSE and 1.51 billion on the Nasdaq. Breadth was even on the NYSE, but decliners led 21 to 18 on the Nasdaq. Dell Computer will report earnings tomorrow. For earnings reports, visit our earnings calendar and reported earnings.

Cisco Systems beat estimates by a penny with fourth-quarter earnings of 16 cents a share. The company’s revenues rose 60% to 5.72 billion, above even the most optimistic estimates of $5.6 billion. Cisco rose 2 5/16 to 67 13/16, but turned back at the important 70 resistance level.

Phone.com soared 12 31/32 to 91 1/32 on news that it is buying Software.com , up 34 5/8 to 142 3/8, for 1.6105 shares of PHCM for each share of SWCM. Phone.com also announced another coup: Cisco executive Donald Listwin, who had been considered heir apparent to Cisco CEO John Chambers, will become CEO of Phone.com.

Analysts did battle over Amazon.com , and the bears won, sending the stock lower by 2 1/16 to 30 7/8. Sanford Bernstein began coverage with a rare Underperform rating, but Salomon Smith Barney reiterated its Buy rating and $80 price target.

Critical Path fell 8 7/8 to 56 1/8, giving back all of yesterday’s 5-point gain and then some, after announcing the acquisition of PeerLogic for 6.4 million shares.

Interwave gained 13/16 to 12 9/16 after the company beat estimates by 2 cents with a fourth-quarter loss of 11 cents a share.

PSINet lost 2 7/16 to 17 3/8 on a Chase H&Q downgrade from Buy to Hold. PSI had risen yesterday on a better-than-expected second-quarter loss.

Rhythms fell 1 5/8 to 12 3/8 after Thomas Weisel recommended that investors in the stock sell into strength. The stock gained yesterday on news of the Verizon/NorthPoint DSL merger.

VA Linux gained 4 5/8 to 38 7/8 on a Deutsche Bank Alex. Brown Strong Buy rating.

NBC Internet lost 35/64 to 10 7/16 on news that the company will reduce its workforce by 20%, or 170 employees.

Register.com slipped 1 1/8 to 17 3/8 after the company announced that it plans to withdraw a secondary offering of 4 million shares because of unfavorable market conditions.

MyPoints.com slipped 21/32 to 13 1/32 on a USB Piper Jaffray downgrade from Strong Buy to Buy. CMGI , which was also downgraded by Piper Jaffray, fell 3 7/8 to 36 1/2. CS First Boston reiterated Buy on CMGI.

Juniper Networks gained 6 1/16 to 165 on the heels of Cisco’s earnings and a Raymond James Strong Buy rating.

DoubleClick slipped 5/8 to 34 3/16 on a CS First Boston Strong Buy rating. The firm called DoubleClick’s restructured contract with AltaVista a positive.

Digital Island lost 2 49/64 to 26 3/4 on a Kaufman Bros. downgrade from Buy to Accumulate. The company met with analysts yesterday.

B2B stocks were lower on lukewarm comments from Jefferies & Co. Commerce One lost 3 15/16 to 47 5/16, again turning back above its recent 52-53 breakout point. Ariba lost 7 1/16 to 135 7/16, barely finishing above yesterday’s breakout point of 135. i2 slipped 1 3/4 to 139 1/8, after turning back yesterday at 148 1/2 at what appears to be the upper boundary of a rising wedge.

Some technical comments on the market: Even Cisco’s best quarter in years couldn’t inspire the bulls today. As expected, the Dow turned back today after closing yesterday right at the upper boundary of its bearish diamond pattern. A close above 11,000 on high volume would just about take that pattern out of play. So far, the index’s decline has been halted by the 10,900 level. The lower boundary of the Dow’s bearish diamond pattern is about 10,450, but we’ll continue to use 10,200-10,300 because of strong support in that range and the requirement of a 3% break of a major pattern. A break of that line could carry the Dow as low as 8,500. Recent support on the Dow is 10,675. Interesting to note that GE set a new high today, but that IBM failed to break out of a massive symmetrical triangle/diamond pattern. The Nasdaq’s rally since bouncing off 3521 last week continues to form converging boundary lines, not a good sign because it means the rally may run out of room. The index rose above its 200-day moving average (3916) this morning, trading as high as 3936, but faded back below that key level. A case of buy the rumor, sell the news on Cisco’s earnings? We are still waiting for a high-volume follow-through to last Thursday’s reversal on the Nasdaq.

The break of rising wedges recently on the S&P, Nasdaq and the ISDEX gives us potential for a lot of downside if this rally fails. The Nasdaq’s break of its bearish rising wedge gives it potential downside to 3042. A break and close below 3500 would be a big warning sign. The selling ended last week right at the 62% retracement level (3521) of the move from 3042 to 4289. The decline was also halted by the Nasdaq’s October 1998 trendline. The ISDEX once again turned back at the lower boundary (770) of its bearish rising wedge. The ISDEX needs to get above that level to negate its broken rising wedge. That broken wedge gives the ISDEX potential downside to 560. Above 770 is 790 resistance, and above that, the ISDEX turned back recently at 840, just below its 50% retracement level of 845. Support levels on the ISDEX are 693-700, 650 and 600. The S&P 500 is struggling at 1480-1490 resistance, turning back this morning at 1490. The S&P’s broken rising wedge gives it potential downside to 1361. Critical support is 1390, the index’s October 1998 uptrend line. A break of that trendline could carry the S&P to 1170 or lower, so we do not want to violate that line.

Recession indicator: Short-term treasury yields moved decisively above 5-year yields today, completing the yield curve inversion. Short-term yields have been above 10-year yields for two weeks; when that phenomenon has occurred for two straight months, it has predicted a recession within six months 86% of the time since 1960.

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