Cisco Earnings Should Fuel Sell-Off

Includes: AAPL, CSCO, QQQ
by: Jason Schwarz

It’s nice to be prepared. 68% cash and 5% QQQQ puts make a day like yesterday very productive as we patiently wait to buy the Apple (NASDAQ:AAPL) August low. Where have we seen this movie before? During the iPhone catalyst trade of 2007 Apple dropped all the way to $111 before finishing the year at $200. The iPad catalyst trade of 2010 is tracking a similar trajectory. I remember being furiously frustrated during an August vacation in 2007 but I also remember reaching an all time portfolio high by the holidays. With a better understanding of the market’s trading range and a better understanding of the direction of economic data this time around, all the action seems to be playing perfectly into our scenario.

Cisco’s (NASDAQ:CSCO) earnings report after the bell yesterday should provide even more fuel to this selloff. The Nasdaq could conceivably sell off another 100 to 150 points before the weekend. If this happens, we will need to consider selling the QQQQ puts on Friday afternoon. The truth is that Cisco had a great quarter with 27% year over year revenue growth but expectations got out of hand which caused the stock to sell off 8% after hours. When the market is ready to correct it doesn’t take much to get the ball rolling. In addition to the revenue miss, CEO John Chambers spooked the market with his declaration that “we are seeing a large number of mixed signals in both the market and from our customers’ expectations, and we think the words unusual uncertainty are an accurate description of what is occurring.”

Cisco is one of the best barometers we have of the tech economy. Mr. Chambers was one of the first to sound a warning bell of the looming recession back in November of 2007 when he reported that Cisco had some softness in orders from big U.S. customers and that he saw dramatic year over year decreases in orders. Expect more selling today. It's an amazing thing to watch market sentiment shift so quickly. On Tuesday, everyone was trying to tell me that this market was going up, up, up and that I was crazy for having so much cash. All I'm going to say about that is that investors should tread carefully when going against the economic timing barometer. I have a prediction: when the economic timing arrow shifts back up everyone will think we're just as crazy to be buying such a terrible market. That's what buying low and selling high is all about.

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