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Rally on holdMarkets buckle under Cisco warning, concerns about aggressive Fed rate cut
NEW YORK (CNN/Money) -- U.S. tech stocks and the broader market tumbled Thursday after Internet gear maker Cisco Systems issued a sales warning for its current quarter. The Nasdaq composite (down 42.28 to 1376.71) fell about 3 percent, while the Dow Jones industrial average (down 184.77 to 8586.24) and the Standard & Poor's 500 index (down 21.11 to 902.65) both lost more than 2 percent. However, analysts cautioned that after a fall rally in which the Dow hit its best month since 1987, a little retreat was not cause for alarm. Stocks rallied for four weeks as investors geared up for Tuesday's congressional elections, Wednesday's Federal Reserve meeting and quarterly profit reports. But with those catalysts out of the way and only Cisco's warning in the rear-view mirror, selling was the order of the day. "All the big news is out of the way, the Fed, the elections, all the big companies have reported. So we've got nothing new except this piece of bad news from Cisco," said Tim Heekin, head of stock trading at Thomas Weisel Partners. So far this week, the three major indexes stand tentatively in positive territory, with the Dow up just under 80 points, the Nasdaq up 16 points and the S&P up less than 3 points. After the close of trade, media and entertainment company Walt Disney reported a fiscal fourth-quarter profit of 11 cents per share, two cents better than the year-earlier, and in line with estimates. Cisco Systems (CSCO: down $0.61 to $12.35), the No. 1 maker of Internet gear, warned late Wednesday that its revenue for the current quarter would be either flat or as much as 4 percent lower than the last quarter. Analysts were expecting revenue to rise during what is historically the company's best quarter of the year. On the upside, the company also reported a fiscal first-quarter profit of 14 cents per share, a penny better than estimates and well above the 4 cents earned a year earlier. Cisco shares are heavily weighted on the Nasdaq and the company is viewed as a key barometer for the health of U.S. technology companies. "They had an opportunity to get tech really rocking if they said something positive, but instead, they guided lower," Heekin added. Chip, networking stocks slideBecause Cisco's business covers many aspects of technology, the warning pressured stocks in a variety of sectors. Among the bigger decliners: shares of networking and telecommunications providers such asJuniper Networks (JNPR: down $0.51 to $7.18) and Foundry Networks (FDRY: down $0.54 to $6.96) as well as some of Cisco's suppliers, such as PMC-Sierra (PMCS) and Applied Micro Circuits (AMCC: down $0.67 to $4.35). Internet stocks were also lower after Prudential downgraded shares of Yahoo! (YHOO: down $1.78 to $15.60) to "hold" from "buy" based on the company's valuation relative to the sector. Shares of J.P. Morgan Chase (JPM: down $1.46 to $20.60) remained under pressure, dragging down the Dow industrials, following a series of early session rumors that the company had suffered large losses on gold trades. A company spokesman denied the rumors, but the stock continued to sell off. Of the 30 components of the Dow Industrials, 27 traded lower, including tech leaders Intel (INTC: down $0.71 to $18.44) and IBM (IBM: down $2.59 to $78.95), amid the broader tech weakness. "Cisco is the excuse today (Thursday) for the pullback, but we're also entering a period of reflection after the recent rally," said Peter Cardillo, director of research at Global Partners Securities. "I think we could see a 3 to 4 percent drop over the next few sessions, before we get back on track." Fed cut, weak dollar consideredOn Wednesday, the Federal Reserve cut its target for the fed funds rate, an overnight bank lending rate, to 1.25 percent, a new 40-year low, in an attempt to rev up the struggling economy. Most economists surveyed by Briefing.com only expected a quarter percentage point cut. Stocks had flip-flopped following the cut before rallying through the close as investors showed confusion with the central bank's decision to acknowledge economic weakness by cutting rates, but then to change their "bias" to neutral stance. The "neutral" bias would usually signify that the risks for inflation and economic weakness are evenly balanced. But in this case, some economists argued, it was more of a message that no further cuts are on the way. The half percentage point cut may have scared a lot of people, Thomas Weisel's Heekin added, as it could be taken as a comment about the severity of the slowdown. Investors may also have worried Thursday about the risks of deflation and the impact it might have on the dollar, which weakened in the wake of the cut, Global Partners' Cardillo said. The euro gained parity with the dollar. However, the dollar was slightly higher against the yen. Treasury prices rose sharply in reaction to the stock selling, with investors bailing out of equities and putting money into the comparatively safer area of fixed income. The yield on the 10-year note fell to 3.86 percent from 4.04 percent late Wednesday. Treasury prices and yields move in opposite directions. Light crude oil futures fell 39 cents to $25.38 a barrel. Gold rallied sharply. Market breadth was negative. On the New York Stock Exchange, losers topped winners by more than 5 to 3 as 1.43 billion shares changed hands. On the Nasdaq, decliners beat advancers by 2 to 1 as 1.73 billion shares traded.
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