Modest declines ended the market’s five-session winning streak on Wednesday. But the news overall still seems good. U.S. politics are as contentious as ever, but progress in the trade war and on Brexit has removed potential sources of worry.
As the calendar turns to 2020, the eleventh year of this bull market, investors might start looking for sectors that have lagged as a potential source of value. One of those sectors might be the networking space. Hardware plays in tech have notably underperformed their software counterparts. Investors have paid up for higher margins, lighter competition, and predictable revenue streams.
That may well continue. But at a certain point, valuation has to matter, and networking stocks look cheap. Thursday’s big stock charts focus on three of the biggest stocks in the sector — all three of which seem to have a near-term path to rally. Investors waiting for the shift from growth to value have been disappointed for most of this bull market, but these big stock charts provide modest hope that the shift might finally play out.
Cisco Systems (CSCO)
Just two weeks ago, Cisco Systems (NASDAQ:CSCO) touched a nine-month low. A disappointing fiscal first quarter earnings report was the primary catalyst. But after a rally from those lows, the first of Thursday’s big stock charts suddenly looks much more positive:
- CSCO stock has made a bullish reversal out of a narrowing declining wedge, a move which often presages a breakout. With near-term moving averages easily cleared, there’s a technical path to the 200-day moving average above $50. Volume of late has been solid. The Relative Strength Index, at 60, still has some room to rise before shares look like they’re overbought.
- Fundamentally, there’s a solid case here, as Dana Blankenhorn detailed this week. He’s not alone; several of our contributors have laid out the bullish argument for Cisco stock. Valuation is reasonable at less than 14x earnings, CSCO stock still yields an even 3%, and 5G should be a catalyst.
- As the industry leader, the breakout in CSCO stock should be good news for the space. Arguing that “as Cisco goes, so goes the networking industry” might be too simple — but it’s also not quite far off. At the very least, peers likely won’t rally if CSCO doesn’t, and so the bullish setup here seems to bode well for the rest of the sector.
Juniper Networks (JNPR)
The news for Cisco’s rival, Juniper Networks (NYSE:JNPR) isn’t quite as bullish at the moment. But the second of our big stock charts shows a path to a continued rally, perhaps with some help:
- Since touching its lowest point in almost three years in late August, JNPR stock has headed in the right direction, with a steady pattern of higher lows. Shares still are hugging the low end of a triangle pattern, which is a risk if the stock reverses again. But the support line of that triangle is holding steady.
- With a bit of a rally, this chart could look much different. Near-term moving averages could shift from resistance to support. And Juniper Networks stock could move toward making a bullish exit out of the top of the narrowing wedge. Obviously, there’s still work to do — and with earnings likely not due until the end of January, JNPR lacks a catalyst. But a rally in CSCO and/or the sector could bring this stock along for the ride.
The broader concern is if JNPR can ever drive real upside. This is a stock that’s been “dead money” for years even in a bull market. Even if traders might watch closely, it’s fair for investors to wonder if Juniper stock can drive a consistent rally going forward, when it hasn’t been able to capitalize on a steadily rising broad market in recent years.
The third of Thursday’s big stock charts, Ericsson (NASDAQ:ERIC), is in the eye of the beholder, but from this perspective looks bullish:
- The bullish interpretation is that the key level just above $9 again has turned to support. ERIC seems to have bounced off moving averages in recent sessions as well. More broadly, the sideways trading since October’s big rally creates a classic pennant formation — a continuation pattern. This looks like a stock consolidating ahead of another leg up, and a potential “golden cross” looms as the 50-day moving average catches up.
- There’s some risk in the chart as well, however. Support has hardly been confirmed. The lower highs relative to the first half of the year create a descending triangle pattern. That pattern quite often suggests a breakout to the downside, with little in the way of support beyond the 50DMA.
- It does seem like ERIC is set to move. If forced to choose, I’d bet that move is positive. Rival Nokia (NYSE:NOK) is struggling, with Ericsson likely a key reason why. Rallies in CSCO and Qualcomm (NASDAQ:QCOM) show some optimism toward 5G. Many investors thought NOK stock was the best 5G play among equipment manufacturers, but it increasingly looks like the choice is ERIC instead. There’s still time — and room — for that thesis to play out.
As of this writing, Vince Martin has no positions in any securities mentioned.