Cisco Ripe for the Buying

Last week, we discussed the improvement in the Nasdaq on both a relative and absolute basis. The relative-strength improvement we pointed out has continued and actually improved further since last week. This relative improvement has occurred as all the major indices have actually moved down, indicating that the Nasdaq has actually been pulling back less than the other major indices.

How does that happen? Well, either the buyers are using any weakness to accumulate shares, or the sellers remain largely absent or not in any great rush to sell these issues, or a combination of both. Either way, the resiliency is occurring because expectations for this sector are improving.

This leads to the question of why investors may suddenly be more interested in Nasdaq issues rather than other areas, such as the leadership sectors of the basic materials. One theory we have is based on the strong move the leadership areas have had. The basic-material stocks are not what we would consider early in the advance. Putting aside any discussions about longer-term changes or major shifts away from this secular advance, these stocks have simply become extended and are in need of a pullback.

Nasdaq/S&P 500 Relative-Strength Comparison

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What does that have to do with technology stocks? When stocks become extended, profit-taking occurs and participants look for less-exploited areas to put those funds to work. The most underexploited area we can think of now is technology. The strength may simply be a case of money finding its way to sectors and stocks with better value that are not extended at this point.

While we haven't heard much about significant fundamental improvements or bullish catalysts in the technology space certain sub-groups have been doing very well. Companies providing equipment, chips or services for wireless and data communications have been acting well and are a source of emerging strength within the sector.

This theme of a macro improvement in technology is still in the early stages, and as such, the safer and easier place to get ahead of this improvement is in the larger-capitalization stocks. We pointed out the improvement in Dell(DELL) and the strength in Intel(Nasdaq) last week.

Cisco

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We can add to our list another large-cap name, Cisco Systems (CSCO). Cisco has made some significant long-term improvements in its technical configuration. The stock has formed a long-term base formation in the weekly chart over the last five years. This type of formation suggests the selling has exhausted itself and the stock is ready to reverse the long-term trend.

Recently, the stock has broken out of this long-term base formation and has been consolidating its gains over the last six months. The breakout and consolidation show us that the bulls have taken control of the stock.

Cisco has turned the corner from a long-term perspective and the bullish reversal is complete. We would buy CSCO at current levels or on weakness to the $26 area. Look for CSCO to advance from this level and produce a new primary uptrend in the coming months.

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