Cisco stock hits multiyear low

Cisco stock this morning in pre-market has hit a multiyear low breaking below $15/share to $14.93 and the big question for investors is when will the drop stop. The previous low was at about $13.80 in March 2009 and it looks like the stock is on its way to retesting that low, as seen in the chart below. The stock is dragging the Dow down and it appears will remain one of the Dogs of the Dow for the foreseeable future, given the mia culpa by its CEO John Chambers recently in the press. It is my opinion that Cisco's turnaround needs require the same medicine that IBM needed in its day, a Lou Gerstner type CEO. I know, as I left IBM before Gerstner arrived, because I saw that IBM was inflexible and flexibility was needed at the time. It took Lou Gerstner to create that flexibility and kill many sacred cows. The person who created the problems can not turn around the business, as he is usually blinded by his own previous decisions and has unknowingly strong attachments to those decisions made in the past being "right." It's a shame the Board doesn't act swiftly to stop this slow death from playing out. There are many very smart employees at Cisco and the talent pool is very deep. The company needs a transformation and a break from past misguided decisions. Ego has killed many a business. Keeping one's Ego in check takes help from experts and a reverence for self examination. I don't think this CEO has that in him.

Dow charts and what they suggest.

I have put together 1 year charts of some of the Dow 30 stocks below and the overall chart of the Dow Industrial average for a comparison. We are at a very critical juncture in the market right now as we have extended the rally now to what appears to be a peak, after having weathered a recent drop in March. The question on everyones mind is whether this means we are going to go higher on our way to 14,000, stay in a tight range or tip over. For some clues, looking at where individual stocks of the Dow are currently, might help us. A number of the stocks that make up the Dow, clearly show they have been leaders over the past year. Leading the gains in the composite Dow over the past year include CAT, DIS and HD. None of the other stocks gained as much from a percentage point of view. Here's a summary of the gains by stocks from the lows around May/June of last year to Friday's close in descending order of percent gains.

CAT 100%
AA 80%
DD 72%
CVX 69%
XOM 55%
GE 54%
PFE 50%
VZ 50%
HD 46%
KO 43%
T 38%
IBM 38%
DIS 38%
UTX 37%
JPM 34%
MMM 31%
TRV 30%
BA 29%
AXP 21%
MFST 19%
MCD 19%
KFT 18%
WMT 13%
MRK 10%
JNU 7%
PG 0%
INTC 0%
HPQ -6%
BAC -13%
CSCO -26%

THE OVERALL DOW JONES INDUSTRIAL AVERAGE HAD A GAIN OF 28% FOR THE SAME PERIOD.

Now, to get a sense of market direction in the coming weeks I decided to focus on the leaders to see what has happened in the past 3-5 days looking for weakness. CAT for example has turned down. AA has paused, as their earnings are to be the first released this week as earnings season begins. DO has also paused. CVX seems to continue to gain as OIL has gone over $110/barrel, so it's continued move up does have a context. The same is true for XOM, it's the price of oil. GE has turned down the past few days. So I have concluded that if Oil prices had not surged, this market would be dropping. Given that premise, oil prices shouldn't surge much from here, unless there are new problems in the Middle East besides Libya, say in Saudi Arabia.

I know the news of avoiding a shutdown of government is a good thing but I don't see much of a rally from it next week. If there is any rally, it should come from Earnings reports. I'm expecting the rally to stall and flounder. Other experts believe a rally is in order. This is definitely a real possibility but at the end of this last push higher is the precipice where stocks will drop sharply as the big scary decline begins. Below are a few of the charts for individual stocks in the Dow and the Dow itself.

Market comments for the week ending Nov. 12th

Well as it turns out the Put to Call ratio did signal this week's drop in the market. The Dow dropped 252 points, but that is only 2.2% for the week. What was also amazing was that Cisco stock dropped about 17% in one day on the news they were going to miss analysts expectations, even while having a good quarter. But Cisco dropped more yesterday closing at $20.15 and hitting a low yesterday of $20.03 for the day. Cisco was as at its recent high of $24.50, before the earnings disappointment. So it has had a 17.8% haircut. Notice from the chart below the gap down but look more importantly at the volume traded. This has more to go down, depending on market conditions.

Now look at the volume during the decline this week and compare it to the previous volume average, from the chart of the Dow below. You will also notice that the pullback on Friday dropped us below the uptrend line. The big question is will it go back over it or continue to drop.

The market does look like it will go down further but it is anyone's guess how much and on which days.

Below is a 3 month chart of the S&P 500, which shows a similar pattern and the break of the uptrend line.

This coming week there will be more political banter, because the President is back from his Asia trip. There has been some deliberate leaked news about proposed cuts in spending and raising taxes from the bipartisan White House Commission on Fiscal Responsibility and Reform that President Obama had formed, which is headed by Erskine Bowles, and Alan Simpson. I think they had leaked these ideas out to the media so that commentary could start in advance of the President returning to Washington, and most likely will dominate the news along with any unexpected Financial bombs which come to light this week. The Irish Debt issue has crept back in the headlines in Europe and there is an uneasiness with the Fed's actions and approach with Quantitative Easing (QE2). Ever onward!

Cisco disappoints analysts in after hours. Stock drops 15%.

In after hours tonight, according to Bloomberg.com, Cisco forecast sales and profit for this quarter that fell short of analysts’ estimates, sending the shares down as much as 15 percent in late trading. This will have an impact on the Dow tomorrow as the Fed will have to start to use QE2 to help prop up stocks, as many sell Cisco shares.

To read this article on the announcement, click here and a commentary on Yahoo here.