Sometimes market moves begin and end with perfectly matched catalysts — bookends, if you will. It’s strange, but a single piece of news can first ignite a rally, and then later virtually the same news can extinguish it. And that’s what just happened to the NASDAQ. That means that for now, the NASDAQ’s bull move is over.
The bookend that marked the end of the rally was the report Wednesday morning by Morgan Stanley’s networking analyst, Christopher Stix, that he was beginning to see stabilization in the death-spiraling revenues of giant networker Cisco Systems. Ironically, the bookend that marked the beginning of the rally on April 5 was a note from another Morgan analyst, David Jackson, who told clients that he had learned from management at optical networking component maker JDS Uniphase that order cancellations had slowed, and that a few new orders had begun to unexpectedly appear. We bought Uniphase instantly, and I posted the details of Jackson’s call on our trading blotter.
Basically the same news both times: revenue stabilization at two important fallen-angel tech bellwethers. On April 5 the news ignited an explosive rally in networkers that lifted the GSTI Multimedia Networking Index 49.7% in less than a month, up to the high achieved at the close Wednesday. Over the same period, the NASDAQ Composite rallied 35.6%.
It really felt for a while on Wednesday like it was going to follow through. I bought several networkers on the opening bell — Juniper Networks, Avici Systems, Extreme Networks, and closely related companies Network Appliance and Applied Microcircuits. But near the end of the day it didn’t feel right anymore, and I sold most of what I’d bought, taking small profits in most of the positions.
And then yesterday morning the world woke up and decided that this month’s version of the revenue stabilization story wasn’t so hot after all. Cisco gave back most of Wednesday’s gains, and the NASDAQ and the GSTI Networking Index gave up even more. Investors who bought the networkers on Wednesday now know they bought a top.
Why was the same story a bottom-maker in April and a top-maker in May? There’s really nothing ironic about it at all. In fact, quite the contrary. Just as a joke isn’t funny the second time you tell it, the revenue stabilization story wasn’t about to trigger a 49.7% move twice.
The first time around, the Morgan team was quietly telling institutional clients that a number of networkers were at trough valuations — even as Morgan’s analysts were lowering their numbers on them. I’ve written about the terrific call we got from the Morgan team on Redback Networks, that allowed us to scoop it right at the very bottom, on April 3.
But that was then. Now the networkers have rallied 49.7%, so it’s not so great anymore to learn merely that the death-spiral seems to have stopped. And it wasn’t a subtle call to institutional clients this time around, either. This time Stix’s Cisco call was front-page news. Stix even appeared in a brief and strangely stilted videotaped interview on CNBC. And when I saw that, I started to realize that the revenue stabilization concept is totally priced into stocks here, and that this cycle is over for a while, until some new catalyst comes along. That’s when I sold most of the stocks I’d bought Wednesday morning.
Stix himself would say the very same thing. In his Cisco report on Wednesday he called the stock “too rich” at 18. It must have amused him to see it gap up 8% on the opening, and close an astonishing 12% higher on the day.
Even the news that Cisco had won a big contract from Global Crossing for its new OC-192 routers, which rolled shortly after Stix’s call on Wednesday morning, couldn’t prop things up yesterday. In fact the Morgan team was telling clients yesterday that Stix was saying Cisco had won that deal simply by being the low bidder — and that stratagem would eventually translate into lower margins.
Until there’s a new catalyst, the NASDAQ — and the rest of the markets — are going to stop going up for a while. And markets that stop going up always go down. So the normal expectation now should be for a 30% to 60% retracement of the gains since early April. When we get to those levels, we’ll be at ground zero for finding out whether this was just a bear market rally or not.
