On Wall Street, it’s said the trend is your friend. And nowhere has that gospel been more a reality than in Cisco Systems (NASDAQ:CSCO). But all good things must come to an end, and now, if it looks too good to be true, you’re either late to the party or staring at a short in Cisco stock. Let me explain.
From the rollout of 5G networks to network security, Cisco has its hands in some of today’s and tomorrow’s growth markets, to be sure. And with the former, Cisco stock is enjoying one of Wall Street’s buzz words of the moment. That’s the good news.
The bad news for CSCO is that where there’s growth, there’s also growing competition from smaller and more nimble rivals such as Arista Networks (NYSE:ANET) or Palo Alto Networks (NASDAQ:PANW). The truth is, unlike Cisco’s go-go days at the turn of the century, the company is far from being the dominant player in these new growth markets. But that’s not all.
As InvestorPlace’s Vince Martin recently noted, investors have priced in a very optimistic or aggressive outlook for Cisco shares. Off the price chart, long-term growth of around 10% and today’s comparatively rich multiple are warning signs Wall Street’s rose-colored glasses will come off.
Bottom line, today’s hot buzzword or promotional deal Wall Street style, such as Cisco stock’s stake in the 5G market, has a history of sometimes turning out badly for investors. Most recently, the music stopped playing for those who stayed the course in cryptocurrencies or stocks bandied about as blockchain disruptors.
Ironically enough, Cisco is no stranger to this phenomenon of hyped up marketing gone bad. Just look at the dot-com era, or what became known as the dot-bomb debacle in the ugly aftermath. It’s a period from which CSCO stock has still not fully recovered.
CSCO Stock Weekly Chart
To say the least, it has been a very friendly trend for Cisco stock bulls in 2019. From last year’s corrective bottom, shares are up over 40% and have outperformed nearly every single one of its peers in the Dow Industrials. Only Apple (NASDAQ:AAPL) has turned in a stronger return from the nadir of December’s broad-based low. Its shares are up 46%. But on the weekly price chart, Cisco’s straight-line run to continued relative new highs since January has put shares in a much more technically tenuous position versus AAPL stock.
Shares of CSCO are coming off a run of nine straight weeks hugging the upper Bollinger Band, while sporting an extremely overbought stochastics that has come along for the entire ride. Now and with Cisco stock putting together a confirmed hangman topping candlestick, shares are positioned for some backing and filling.
It’s recommended that investors who can’t resist Wall Street’s 5G siren song — who are positive on Cisco’s security prospects or maybe the company’s switching gear (which admittedly has been selling well) — still wait. At a minimum, if you’re looking to play momentum in CSCO, a shorter technical pause of two to three weeks before entering a long position makes sense given the severity of the price run.
And if you’re less hot on Cisco stock’s future prospects and see the rally built more on hype and hope than solid ground, shorting today’s topping pattern is definitely approachable. However, keeping a stop tethered to last week’s high, or better yet using a protective options position with earnings scheduled next week, is also 100% advisable.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.