Cisco Causes a Tech Wreck

The Nasdaq ends sharply lower while the Dow erases a big loss.
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Updated from 4:06 p.m. EDT

The

Nasdaq Composite

resumed its downward trajectory Wednesday, falling to a new 2004 low on a disappointing sales estimate from

Cisco

(CSCO) - Get Report

before making up some of the plunge in the session's final hour.

The tech-dominated index ended down 26.28 points, or 1.45%, to 1782.42 after hitting 1760.5 around noon, setting a fresh 2004 low just one day before investor registration is scheduled to end in the widely anticipated

Google

IPO. The fall was paced by a 5.2% drop in the Philadelphia Semiconductor Index and a 4.7% dive in the Amex Networking Index.

Among broader gauges, the

Dow Jones Industrial Average

shed 6.35 points, or 0.06%, to 9938.32, while the

S&P 500

lost 3.25 points, or 0.30%, to 1075.79.

Volume was moderate, with over 1.4 billion shares trading on the

New York Stock Exchange

, where decliners outnumbered advancers by about 5 to 4. On the Nasdaq, nearly 1.8 billion shares changed hands, and decliners almost doubled advancers.

Analysts expressed relief that stocks were able to show some late momentum.

"You have to think this is impressive given the first hour of the day, but the reason for

the bounce off the session's lows seemed to simply be money flowing out of one area and flowing into another," said Larry Wachtel, senior market analyst with Wachovia Securities, who noted that defensive, blue-chip stocks seemed to be the lead gainers in the afternoon. "It's encouraging that we're able to thwart the price of oil though."

Oil prices ended higher after a volatile day in which Iraq revealed that its production has been cut in half by sabotage in the country's southern region. Prices eased in the late morning after Saudi Arabia said it had an additional 1.3 million barrels of oil a day at its disposal, but Nymex crude for September delivery eventually closed up 28 cents to $44.80, just shy of the record high of $44.84 touched Monday.

In other markets, the 10-year Treasury note traded up 5/32 in price, pushing the yield down to 4.27%, while the dollar was weaker against the yen and stronger against the euro.

Arthur Hogan, Chief Market Analyst with Jeffries, said the action was "kind of crazy," starting off with the disappointing Cisco earnings and followed by "wild gyration" in the price of oil throughout the day.

"We're concerned about the economy, whether we're recovering or not," Hogan said. "That was highlighted by the weaker than expected jobs data last week, and on top of that we're concerned about the ill effects of higher energy prices. We seem to be in lock step with both of these fears and today is no different."

Cisco closed down $2.17, or 10.6, to $18.29 after warning that revenue growth in its current quarter would struggle to hit 2%, the low end of analysts' expectations. The network gear maker also saw its inventory balloon nearly 8% to $1.21 billion at the end of the last quarter, reflecting a trend that previously spooked tech when reported last month by

Intel

(INTC) - Get Report

.

At least three brokerages, J.P. Morgan, Merrill Lynch and UBS, downgraded Cisco's stock.

Wednesday's weakness came one day after stocks staged a fairly significant rally in the run-up and aftermath of the Federal Reserve's decision to raise interest rates. Investors evidently took heart in the FOMC's economic assessment, which predicted a return to robust growth after transitory catalysts, such as high oil prices, eased. The Dow rose 130.01 points, or 1.32%, to 9944.67, while S&P 500 added 13.82 points, or 1.30%, to 1079.04; and the Nasdaq rose 34.06 points, or 1.92%, to 1808.70.

On the economic front Wednesday, the Treasury Department said the federal government ran a larger-than-expected deficit in July, totaling $69.2 billion, up from the $54.2 billion recorded in June. Economists expected July's shortfall to be smaller, at $60.5 billion.

In corporate news, chip-assembly company

Kulicke & Soffa

(KLIC) - Get Report

said fourth-quarter revenue should be about $135 million to $165 million, short of the Wall Street estimate of $186 million. The company said "customers are now more cautious about the timing of future demand," a statement that chilled chip investors who have been looking for signs of a demand peak in the sector.

Kulicke closed down $1.76, or 25.1%, to $5.26. Other stocks that appeared to fall in sympathy included

STMicroelectronics

(STM) - Get Report

, down 64 cents, or 3.6%, to $17.08;

Teradyne

(TER) - Get Report

, down $1.21, or 7.8%, to $14.20; and

ASML Holding

(ASML) - Get Report

, down 49 cents, or 3.6%, to $13.25.

Teradyne was cut to neutral from outperform and had its price target cut to $15 from $25 at CSFB.

Also trading sharply lower Wednesday was

National Semiconductor

(NSM)

, which warned that sales in the quarter ending Aug. 29 are likely to be 4% to 5% below the $571 million it put up in the prior quarter. Analysts had been expecting sales to be flat to up 3% from the prior quarter. Shares in the analog chipmaker closed down $2.23, or 14.2%, to $13.47.

Abercrombie & Fitch

(ANF) - Get Report

traded sharply lower Wednesday after saying earnings in its current quarter would be roughly comparable to the 51 cents a share it earned a year ago. That's well short of analysts 59-cent forecast. The stock, which was downgraded by Piper Jaffray Wednesday, closed down $4.14, or 12.4%, to $29.32.

Elsewhere, second-quarter earnings at

Federated Department Stores

took a hit from a $59 million charge related to a debt buyback. It earned $78 million, or 43 cents a share, compared with $120 million, or 64 cents a share for the same quarter last year. Excluding the charge, the company's performance was slightly above Wall Street's estimates. Its stock closed down $1.52, or 3.3%, to $44.50.

After Tuesday's close,

Disney

(DIS) - Get Report

posted third-quarter earnings of $604 million, or 29 cents a share, up from $502 million, or 24 cents a share, last year. Excluding a 2-cent-a-share charge, the company easily surpassed analyst forecasts for earnings of 27 cents a share. Revenue was $7.47 billion, also well ahead of estimates. Its stock closed down 66 cents, or 2.9%, to $21.78.

Overseas markets closed mostly lower, with London's FTSE 100 down 0.9% to 4312 and Germany's Xetra DAX off 1.1% to 3679. In Asia, Japan's Nikkei rose 0.9% overnight to 11,049, while Hong Kong's Hang Seng fell 0.5% to 12,343.

Thursday marks a big day for the retail sector, with second-quarter earnings due out before the open from

Walmart

(WMT) - Get Report

, expected to post profits of 61 cents a share, up from 52 cents in the same period last year; and

Target

(TGT) - Get Report

, expected to post earnings of 47 cents a share, up from last year's 39 cents a share.

At 8:30 a.m. EDT, the Census Bureau is expected to report that retail sales increased by 1.1% in July after dropping at that rate in June. Excluding auto sales, economists predict sales were up by 0.4%.

At the same time, the government is expected to say that business inventories grew by 0.6% in June, up from 0.4% in May, and the Labor Department will report initial jobless claims tallies for the week ended Aug. 7. Wall Street's estimates show claims 4,000 for the week, totaling 340,000.

After the bell, earnings are due out from

Dell Computers

(DELL) - Get Report

,

Kohl's

(KSS) - Get Report

and

BEA Systems

(BEAS)

.