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Cisco earnings may have sparked bullishness

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I can only think of two "reasons" for today's bullishness in stocks. Either the lower readings of bullish % or tonight's earnings release from Cisco Systems (NASDAQ:CSCO) $12.18 +7.2% has traders thinking back to last quarter's earnings when CSCO didn't disappoint and gave modestly bullish guidance for the future.

Cisco Systems Chart - Daily Interval

Shares of CSCO came very close to trading a new 52-week low yesterday, but have rebounded sharply ahead of tonight's earnings. Back in early May, we also see that CSCO was headed south into earnings, but a "lack of disappointing guidance" had the stock gapping higher after earnings, which helped spark a broad rally on May 8th, and for a week thereafter.

While this "thinking" may seem a little late to some, it may not be as it relates to trader's current account risk and management. Should CSCO not disappoint or give a "bearish outlook" it certainly looks as if the MARKET has discounted the stock into earnings and a "gap up" situation could be imagined to the $13.25 level with further upside to the upper-end of regression at $14.50. At the same time, a negative earnings report and "lack of visibility" type guidance for the future could see the stock gapping back down to yesterday's low.

In recent months, we've noted that some of the DOMINANT players in their respective industries have shown some growth that has come from market share gains, but not necessarily buying trends from corporate customers. Two names that come to my mind in recent weeks has been Dell Computer (NASDAQ:DELL) $24.50 +6.01% and International Paper (NYSE:IP) $38.04 +3.37% reporting some upside earnings news on gains in market shares and cost cutting measures.

With Cisco (CSCO) being a dominant player in the networking area, I would have to think that they too are most likely making market share gains against their competition. This is nothing new and has been mentioned in the company's past quarterly earnings reports.

However, I've also noted that telecom service providers have continued to cut their capex budgets in recent years/months/weeks in order to try and sure up balance sheets and attempt to get some profits to the bottom line and I'm not looking for Cisco to report a "resurgence" in capex benefits from customers.

I do think (as has been the thought) that bears continue to have the bulk of the risk in many short positions, especially those that carry longer-term gains.

We're seeing some a rather strong round of selling today in the Treasury markets. This may be due to some of the Treasury auctions today, but it may also be another type of asset allocation shift from institutions ahead of Cisco's numbers on a short-term basis.

If I'm correct in my "Cisco earnings" scenario, then one of my "tests" into the close would be to keep an eye on CSCO. If my comments regarding CSCO's business (gain market share, but still lacking corporate capex increases) is correct, then I think the stock should settle out "neutral" near the $12.27 level, right in between the 100% and 80.9% retracement levels.

This most likely creates a EXTREME risk/reward type of trade/account management decision for traders into tonight earnings. Not only as it relates to Cisco (CSCO), but the broader markets as well.

On May 8th, after Cisco's last earnings release, the S&P 500 Index (SPX.X) jumped 3.7%. If a trader's account is 100% on the short side near the close, keep this in mind as it relates to account risk management.

Even more importantly, and why I do think bears have more risk and why we may be seeing such bullish gains today and some selling in Treasuries, is that in May, the S&P 500 Bullish % ($BPSPX) from www.stockcharts.com was "bear alert" near 58% while last nights reading was "bull alert" at 25%. Should Cisco give any type of "improvement in capex" spending, bears could be in some trouble.

Jeff Bailey
Senior Market Technician
Option Investor


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