{"id":3362,"date":"2010-11-12T00:31:06","date_gmt":"2010-11-12T05:31:06","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=3362"},"modified":"2010-11-12T00:42:54","modified_gmt":"2010-11-12T05:42:54","slug":"no-mean-reversion-for-cisco","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2010\/11\/12\/no-mean-reversion-for-cisco\/","title":{"rendered":"No Mean Reversion for Cisco"},"content":{"rendered":"

The shorts in Cisco (CSCO) had it right after all…even if they were a bit early.<\/p>\n

Short interest in CSCO surged in late August<\/a> close to 52-week highs. When I noticed this in mid-September, I made a somewhat complicated case for using this as a contrarian signal to go long the stock. CSCO trickled upward with the market, but by early October I recommended that it was time to end the trade<\/a>:<\/p>\n

“…CSCO has lingered at resistance for over a week, apparently lacking a catalyst to move higher. CSCO\u2019s 10% performance on the month fell short of the NASDAQ\u2019s 12% gain on the month. Moreover, the NASDAQ has cleared important resistance at its June highs whereas CSCO is still struggling to fill its post-earnings gap-down from August. If the general stock market remains bullish, CSCO could continue drifting higher, but it is difficult to make a case for a change in the poor relative performance. So, it makes sense to look elsewhere for bets on tech.”<\/p><\/blockquote>\n

Given CSCO’s revenue warning for FY2011 ($43.6-44.8 billion was below the $45.28 billion analyst consensus), the relative under-performance now makes sense in hindsight. The interesting twist to this story is that CSCO’s October under-performance had not been seen since the crash in the fall of 2008 (see chart below). If I had noted this before earnings, I would have guessed that CSCO was about to “revert to the mean” – that is begin a period of out-performance relative to the NASDAQ. I have made similar calls in other trading pairs.<\/p>\n

Instead, CSCO’s 16% post-earnings drop sent the stock’s relative performance to its worst levels since early 2006 (not included in the chart) and close to the 52-week lows from the end of August (where shorts stampeded into position). The incredible 553 million shares traded Thursday were the third highest in CSCO’s 20-year history as a publicly traded stock. The two higher days: 701M on November 8, 1990 when CSCO recorded a 20% GAIN on the day; and 807M on May 13, 1994 when CSCO lost 20% for the day – CSCO bottomed two months and 16% in more losses later. (Note that as of October 29, total shorts in CSCO were 46.6M shares<\/a>, just 0.8% of float and 11% below August’s surge to 52.4M shares short.)<\/p>\n


\n
\"NASDAQ<\/a>
NASDAQ vs CSCO price ratio<\/figcaption><\/figure>
\nSource: stockcharts.com<\/a><\/strong>
\n<\/center><\/p>\n

Despite all this, I decided to nibble on some CSCO stock as an eventual recovery play. I tucked it tuck away into a deep, dark corner<\/a> without any targeted timeframe for this recovery. Later, I was gratified to read in briefing.com that John Chambers claimed in a CNBC interview that the company will aggressively buy back stock once it can return to the market. I am hoping today’s reduction in guidance is tomorrow’s eventual opportunity for upside performance.<\/p>\n

(Comedy sidebar: Jim Cramer throws a fit and practically labels Cisco an evil company based on its performance for the quarter – click here for video<\/a>).<\/p>\n

Be careful out there!<\/p>\n

Full disclosure: long CSCO<\/p>\n","protected":false},"excerpt":{"rendered":"

The shorts in Cisco (CSCO) had it right after all…even if they were a bit early. Short interest in CSCO surged in late August close to 52-week highs. When I noticed this in mid-September, I made a somewhat complicated case for using this as a contrarian signal to go long the stock. CSCO trickled upward … Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[220,219,62],"tags":[254,255,1597],"class_list":["post-3362","post","type-post","status-publish","format-standard","hentry","category-earnings","category-high-tech","category-technical-analysis","tag-cisco","tag-csco","tag-technical-analysis"],"yoast_head":"\nNo Mean Reversion for Cisco - ONE-TWENTY TWO: Trading Financial Markets<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/drduru.com\/onetwentytwo\/2010\/11\/12\/no-mean-reversion-for-cisco\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"No Mean Reversion for Cisco - ONE-TWENTY TWO: Trading Financial Markets\" \/>\n<meta property=\"og:description\" content=\"The shorts in Cisco (CSCO) had it right after all…even if they were a bit early. 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