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Let's perform an experiment today and tomorrow; a real-time determination of whether there is a leading causal relationship between fundamentals and stock prices. That is, if the stock price follows the fundamental data. For those of you that have read the many pieces on my complexity theory of asset pricing I have written, on the role that behavior plays in the price discovery mechanism, and the resulting non-linearity in the stock market, you already know where I stand. I believe stock prices lead fundamentals and that looking at stock price data alone is sufficient to gain an edge on what (1) the fundamentals are and (2) how the Street will likely respond to them.

So let's see what we can limn from the price action alone of CSCO's chart. First, let me state emphatically that I know nothing about what CSCO is going to say tonight. For a host of (mostly cynical but probably realistic) reasons, I don't care what CSCO says on their calls. And further, I don't care what the sell-side 'says' about CSCO's results or what long-only mutual fund PMs say about their core holding (when will it ever be anything but positive?). OK, that's not entirely true: I do know some things, but certainly have no edge (an admission I dare, in this age of regulation FD, the sell-side to make).

But I do know that markets are non-linear, that they form scale invariant patterns at different degrees of time scale, that they naturally foster competing positive and negative feedback regimes, and generally act like a complex system. Oh, and I know that humans, in the context of limited information and within a social (group) setting, tend to herd thanks to the propensity for crowds to become a function of the lowest common denominator (think about this the next time you are at a highway tollbooth, a subway turnstile, or an entrance to a theater).

We're only concerning ourselves with CSCO's short term pattern, which is to say hourly multi-day chart. Longer term you will be surprised to hear that I actually like CSCO a bit lower as it might well be near a 5th wave down from the peaks registered at the January 2004 peaks. In any case, the move off the $17.41 low on the 25th has - so far - taken on the look of an ABC upward zigzag correction. That is, a correction against the dominant downtrend in force from the January 2004 peaks. Thus, the downtrend remains dominant until we get enough data to suggest a larger degree correction of the entire 2004 to present decline is imminent. We're not there yet, but as my longer term bias above suggests, we could be close.

In any case, if indeed the move up from the 25th lows is a correction which it certainly seems to be, then wave C (2/3 lows to present) will equal wave A (Jan 25th to Jan 28th) in the $18.43-18.48 region. So far today the intraday peak is $18.43, so all the minimum pieces are in place for CSCO to decline to a new low beneath $17.41 over the next handful of trading days, a negative 5%+ move. I would add that some DeMark hourly trend exhaustion indicators and some short term momentum divergences are now present. Taken together, these technical indicators suggest that CSCO's 'news' tonight will either be perceived as negative or will actually negatively surprise. Of course CSCO could say something positive as well, in which case, if the stock declined (as we think it very well could over the next several sessions), the good folks in the financial media would blather endlessly "despite the good news from CSCO, the stock is down today in what traders are calling 'profit taking" or some other pabulum.

The larger point is that fundamentals do not lead stock prices. A point that I simply cannot make enough. And though it is heresy, it is also true. Knowing what a stock's fundamentals are is not sufficient to understand what the stock itself is likely to do. Indeed it might even be a detriment to generating returns.

If CSCO does decline as I believe the price action is telling us, it proves nothing. It's just one data point. But perform this task enough times and you will become convinced that there is no long term leading correlation between fundamentals and stock prices. Stock prices tell us what earnings are going to do. Not the other way around.
No positions in stocks mentioned.

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