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Stocks Up, Techs Win Again; Will Cisco Double From Its Breakout?

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Stocks acted bullishly on Thursday, one day after the Nasdaq and the S&P 500 posted an important follow-through day that confirmed a new market uptrend may be in the works.

[ibd-display-video id=2382612 width=50 float=left autostart=true] Meanwhile, Cisco Systems ( CSCO ) reasserted its newfound strength following better than expected quarterly results. The megacap computer networking and telecom equipment play soared nearly 5% to 44.17, padding its gain to 29% from an October 2017 breakout from a bottoming base pattern at 34.20.

That bottoming base was a saucer with handle that began with a peak of 34.60 in May.

At 3:30 p.m. ET, the Nasdaq composite, which vaulted nearly 1.9% on a Day four follow-through on Wednesday, added almost 1.4% on Thursday while the S&P 500 and the Dow Jones industrial average rose nearly 1%.

Small caps were not far behind. The S&P SmallCap 600 gained nearly 0.9%.

While the Nasdaq has gained further ground above its critical 50-day moving average, the S&P 500 is close to making its first close above this medium-term support and resistance level for the first time since Feb. 2.

In a healthy market, both the major indexes and key leading stocks trade above their 50-day moving averages, which in turn are rising and above the longer-term 200-day lines.

That was pretty much the story for 2017.

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In the stock market today , retail, consumer spending and software companies led the upside. Consumer electronics, leisure products, desktop software, medical software, travel booking, movie and automaker firms all rallied 2% or more.

Oil drilling stocks fared the worst despite a more than 1% rebound in U.S. crude oil futures to $61.36 a barrel.

While some companies have retaken prior buy points, some former leaders look to try to set up new breakouts.

Applied Materials ( AMAT ), up more than 2%, may be setting up a shakeout + 3 pattern as it rises more than 3 points above the Dec. 5 low of 48.25.

Given that the chip equipment giant trades at a fairly high share price, an investor could consider adding 5 or 6 points to the 48.25 low and see if it moves past 53.25 or 54.25 before making an aggressive buy. That price would still be lower than the 58.73 midpoint in the emerging double bottom base that has been forming.

Applied Materials posted a sterling quarter late Wednesday with earnings rising 58% to $1.06 a share on a 28% lift in sales to $4.2 billion. Both increases represented an acceleration in growth on the top and bottom lines.

Can Cisco Retake Its All-Time Peak?

Going back to Cisco, the stock holds a respectable Composite Rating of 85 on a scale of 1 to 99, as seen in IBD Stock Checkup . As seen in this proprietary research tool, Cisco thus ranks No. 5 within IBD's Computer-Networking industry group in terms of this blended rating that analyzes fundamentals, relative stock price performance, quality of institutional sponsorship, and other factors.

From the recent proper buy point of 34.20 from an early-stage base, a 100% move to 68.40 would still keep Cisco below its all-time high of 82, set during the peak of the dot-com bubble in March 2000. (Please go to a monthly MarketSmith chart to see the tremendous move of Cisco during the 1990s, the peak in 2000, and the long deep correction.) Breakouts from an early stage base have a better chance of making meaningful gains than from a late-stage base .

Regardless of how far the stock can rebound, it is undeniable that Cisco should be judged as an emerging turnaround story, much like some of the biggest fellow tech companies on the Nasdaq that have done well over the past 12 months. Why?

Earnings in the January-ended fiscal second quarter ramped up 11% to 63 cents a share, nicely beating the consensus estimate by 7%. That was the biggest year-over-year gain since the fiscal second quarter ended in January 2015. One reason: revenue picked up 3% to $11.89 billion, ending a seven-quarter slump.

Cisco management noted in a presentation late on Wednesday that they are making "further extension of cloud-focused software offers" as well as beefing up "endpoint protection capabilities" in its data security business. By product category, Cisco's applications and security-related revenue jumped 6%, faster than the 3% rise in services and only a 2% gain in infrastructure platforms.

Plus, the company notes "continued progress in shifting more of our business towards software and subscriptions," which seem to imply that profit margins could continue to rise.

Higher margins, combined with plans to expand share buybacks, bode well for continued improvement in quarterly earnings growth. And that's the stuff of strong growth stocks, the C in IBD's CAN SLIM seven-point investment model .

Cisco's after-tax margin jumped 180 basis points to 26.5%, the highest in at least four years.

( Please follow Saito-Chung on Twitter at @IBD_DChung for additional commentary on leading stocks, breakouts, corporate news, and financial markets. )


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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