On November 7th, 2007, Cisco Systems (CSCO) had just broken out above massive technical resistance, recovering some very important ground from the aftermath of the dotcom collapse that saw its stock decline from the low $80s in early 2000 to the high single digits in 2002:
All seemed right in the world, until the next evening when the company guided down, pointing to weakness in end markets that would ultimately prove to be the epic-center of the looming financial crisis, from Bloomberg Nov 8th, 2007, emphasis mine:
Cisco Systems Inc. dropped the most in more than three years on the Nasdaq after Chief Executive Officer John Chambers said a “dramatic” decline in sales to automobile and financial companies is curbing growth.
The announcement marked the second time this year San Jose, California-based Cisco disappointed investors as a housing slump and tightening credit markets have forced U.S. companies to cut network spending. Cisco shares had climbed 10 percent since its last earnings report on speculation sales in developing markets would more than make up for a slowdown at home.
The stock fell nearly 10% the next day and kept going before it bottomed in Q1 2009, down 60% from its Nov 7th 2007 highs:
Oh, and that was obviously then the top of the Nasdaq Composite which lost 55% of its value during the same period:
While many market observers were concerned about housing, autos and related lending, many were convinced that technology companies would be immune to the credit issues facing large parts of economy. They felt there was potential for technology and their strong balance sheets and global leadership in secular computing trends to de-couple from the woes of housing. Emerging markets and Europe were also to de-couple from our housing issues further insulating U.S. tech companies. That all changed when CEO John Chamber’s got honest. Almost all of CSCO’s mega-cap tech peers issued Q3 results and offered Q4 guidance, and NONE offered the level of clarity that Chambers did about end markets and geographies. They either lied or catered their message.
So what’s this have to do with today? Last night Intel (INTC) reported Q4 results, and offered a very downbeat forecast (stock is down 6% in the pre-market) and one analyst (Chris Caso of Susquehanna) called the company’s guidance ‘Uncharacteristically Cautious’. I guess at this stage of the game it makes sense to take management’s caution as just that, caution, and question cautious optimism as uncharacteristic in the current state of the global economy. Buying dips after cautious optimism worked when the U.S. Fed put was in place. But it’s an entirely different scenario now with massively divergent monetary policy between the U.S. and China/Europe/Japan.
Sell into rallies for now. It’s that simple. Complacency is NOT an investment strategy. Take cautious guidance at face value. But also be careful of pressing openings like today on the short side. We are now in a one step forward two steps back market.