Dow falls after Cisco warns on earnings

CISCO’S discouraging outlook dragged Wall Street lower yesterday, but the market fought back in a sign the bullish trend remains intact.

Cisco lost 16.2 per cent to $20.52 after its earnings report. Major indexes plunged shortly after the open, with Nasdaq falling more than two per cent, but slowly came back as investors viewed Cisco’s problems as company-specific.

“This is a recipe for disaster but the fact is, the market is doing pretty well,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
“The market is exhibiting considerable strength here, considering the run we’ve had in the past few weeks, negative news out of Cisco, and the dollar doing well.”

In the past, major averages have taken a bigger beating the day after Cisco’s earnings disappoint.

Short-term technical indicators suggest the stock market is still in an uptrend, and options action in Cisco reversed earlier bearishness as traders moved to rebuild bullish positions.

“There was a panic sell-off initially [on Cisco’s outlook] but people are starting to realize that maybe this is just a Cisco-specific story,” Massocca said.

Cisco stock suffered its worst one-day percentage drop since July 14, 1994, when it slid 17.71 per cent, according to Thomson Reuters Datastream. However, Cisco’s decline accounted for more than half of the losses in the Nasdaq 100 Index.

The Dow Jones industrial average fell 73.94 points, or 0.65 per cent, to 11,283.10. The Standard & Poor’s 500 Index shed 5.17 points, or 0.42 per cent, to 1,213.54. The Nasdaq Composite Index lost 23.26 points, or 0.90 per cent, to 2,555.52.

Cisco’s warning dragged down shares of other tech heavyweights. Microsoft lost one per cent to $26.68, and Hewlett-Packard dropped 2.5 per cent to $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.

On Wednesday, Cisco’s chief executive John Chambers cited weak public spending as well as service providers, namely cable companies that have been losing customers, but said he saw the slowdown as “a couple of air pockets.”

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 per cent from the end of August, compared with the S&P 500’s gain of about 16 per cent.