MarketView for November 11

Summary 

Cisco's reduced revenue outlook sent Wall Street skidding lower on Thursday, although the bullish trend remains intact. Cisco lost 16.2 percent to $20.52 after its earnings report, as the shares suffered their worst one-day percentage drop since July 14, 1994, when the stock fell 17.71 percent, according to Thomson Reuters Datastream.

Cisco's decline accounted for more than half of the losses in the Nasdaq 100 Index. Major indexes plunged shortly after the open, with Nasdaq falling more than 2 percent, but slowly came back as Cisco's problems were viewed as being company-specific. In the past, major averages have taken a bigger beating the day after Cisco's earnings disappoint.

Cisco's warning dragged down shares of other tech heavyweights, including Microsoft down one percent to $26.68, and Hewlett-Packard, which fell 2.5 percent to close at $43.06. More than 531 million shares had traded in Cisco, the fourth busiest day in the stock's history, according to Thomson Reuters Datastream.

Cisco's disappointing outlook came as the market's recent rally lost steam. Tech shares have led that rally, with the S&P information tech index up about 21 percent from the end of August, compared with the S&P 500's gain of about 16 percent. Nonetheless, Short-term technical indicators suggest the stock market is still in an uptrend, and options action in Cisco reversed earlier bearishness as bullish positions were rebuilt.

The day's decline has helped the market recover from an overbought condition, with the smoothed relative strength index at about 63, off a recent high of 78. Technical indicators showed that Cisco's stock was oversold, but the moving average convergence-divergence (MACD) triggered a "sell" signal. Momentum dropped to its lowest in 2-1/2 months.

Thursday's tumble took Cisco's stock below its 14-, 50- and 200-day moving averages. The stock stayed above the year low, which could provide some technical support. On a closing basis, the year low stands at $19.99 on August 31.

In the options market, many investors took positions betting on the recovery in Cisco's shares. More than 1.03 million option contracts have changed hands on Cisco Systems, with investors favoring calls over puts in afternoon trade. Trading volume was about 7.8 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared with the year-to-date daily average of 8.72 billion.