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Thursday Look Ahead: Cisco Effect, Jobless Claims Will Set Tone for Stocks

Cisco's warnings about an uncertain environment will likely pressure stocks Thursday and give investors even more reason to fear a weakening economy.

Technology shares, among the big losers Wednesday, lost ground in after hours trading, after Cisco's surprise revenue and margin misses, and even more worrisome commentary and guidance.

Stocks were crushed Wednesday, dragged down by a steep decline in cyclical names. Concerns about a slowing Chinese economy, and the Fed's downgrade Tuesday of the U.S. economy combined to give a double whammy to investor confidence in the global economic recovery.

The Cisco news promises more of the same. CEO John Chambers told analysts that Cisco is seeing mixed signals from the markets and its customers though he does not expect a double dip. He is scheduled to appear on "Squawk on the Street" Thursday at 9:10 a.m. ET.

"The Cisco miss was bad," said Dan Niles of Alpha One Capital Partners on "Fast Money."

"The thing you have to remember over the last few days...you had analysts raising numbers into Cisco's quarterly results. You had John Chambers out talking during the quarter about how he saw no slowness in Europe, how things were actually tracking better than expected, and so you go into this. They miss the revenues. They miss the gross margins," he said. Niles pointed out that Cisco also guided the next quarter to where the top end of the range is below where consensus was on revenues.

"..So something changed very dramatically, end of June, beginning of July, across the globe and across their customers is what they said," said Niles. The Cisco news follows a sell off in semiconductor stocks this week, on worries of weakening PC sales and a chip glut.

The Dow Wednesday fell 265 points, or 2.4 percent to 10,378, its biggest one-day drop since July 15 and its lowest close since July 22. The S&P 500 fell 31 points, or 2.8 percent to 1089, giving it a year-to-date decline of 2.3 percent. The Nasdaq was the biggest loser, down 3 percent to 2208, as tech stocks took a pounding.

The 10-year was yielding 2.690, its lowest level since April, 2009, and the 2-year was at 0.513 percent. In the currency market, the dollar mostly gained but weakened against the yen, touching a 15-year low against the Japanese currency.

Oil tumbled 2.8 percent to $78.02 along with other commodities on concerns about global demand. Grains also fell on the dollar's strength and as traders took profits ahead of Thursday's 8:30 a.m. crop report from the U.S. Department of Agriculture.

What to Watch

Thursday's markets face weekly jobless claims, which disappointed last week when they rose to 479,000. Economists expect 465,000 claims this week, when the data is released at 8:30 a.m. Import prices are also released at 8:30. At 1 p.m., the Treasury auctions $16 billion in 30-year bonds.

There are a few earnings, including General Motors, which is expected to announce its IPO Friday. Sara Lee, Kohl's, Urban Outfitters, and Nordstrom also report.

"The jobs claims number is going to dictate what the market does," said Richard Bernstein, ceo of Richard Bernstein Advisers. Bernstein commented ahead of the market close and Cisco report.

"There's all this noise floating around, but the ultimate issue is jobs. Jobless claims have gone sideways for a long time, and the market has gone sideways," he said.

Art Cashin, director of floor operations at UBS, said jobless claims is the big number traders will watch early, but they are also keeping an eye on key levels on the S&P 500. "They held together in the support of 1088 to 1091. If they break again in the next day or so, you've got to watch the area around 1051 to 1054, and if that breaks, then we may go back to test the lows," he said.

Scott Redler of T3Live.com said he expects the negative Cisco news to push the S&P below 1085 at the open and could put 1070 in play. "We're looking at whether we could hold the 1070 level," he said.

"This will be the level to see if it can attract buying interest, which will direct the market for the rest of the summer," he said.

Spooked by the Fed

Bernstein said he is still somewhat bullish but more cautious on stocks and expects the equities market to benefit as soon as there is an improvement in U.S. economic data. However, he and others think the Fed may have added a new level of uncertainty to markets.

"The Fed believes the economy is weak enough that they need to act, but they wrong footed this response," he said.

"They are working against themselves. This announcement worked against what they hoped for," said Bernstein.

The Fed Tuesday signaled that it sees a worsening economic picture and said it was returning to a form of quantitative easing, where it would use the proceeds from the maturing mortgages on its balance sheet to buy Treasurys. As a result of that news, buyers moved into Treasurys and yields dipped. The gap between the 10-year and 30-year yields was at its highest level ever.

But Bank of America credit strategists, in a note, said its best to think of the Fed move as a neutral policy stance, keeping the Fed's balance sheet stable. Since it will buy Treasurys, the mortgage runoffs would therefore not result in passive tightening. The Fed expects to purchase about $18 billion Treasury securities in the next month.

Jefferies Treasury strategist John Spinello said the move was purely symbolic, and the Treasury purchases will ultimately have no impact on the market. "It's an absolute wash. It's no easing. It's no tightening," he said. But importantly the dialogue around the Fed in recent months has flipped from exit strategy, and the change is taken as a sign the Fed sees a longer term, weak economy.

"Meanwhile, the Treasury is putting ten times more Treasurys into the market," said Spinello.

Spinello expects Thursday's 30-year auction to go smoothly. "I think there will probably be a little more speculative interest and some real money will participate given this is the highest yielding issue," he said.

David Gilmore of Foreign Exchange Analytics said Thursday's market action will be important. "What kind of bounce we get in stocks tomorrow, and what kind of rebound in the euro and what kind of weakness in the yen tomorrow are all pretty critical to this narrative. I think if we don't get a bounce in risk, it's full speed ahead to a new narrative," he said.

"I think what the Fed revealed is the markets are very fragile. Confidence is fleeting and what looked like a global recovery looks like deflation and stagnation, delivered by the Fed," he said.

"When your Central Bank signals that it might be printing more money and a day later your currency is strengthening, it says what's wrong with this picture," he said.
Gilmore, who calls himself a serious bear, said markets risk reverting to behavior during the recession months of late 2008 and early 2009.

- Follow me on Twitter @pattidomm.

Questions? Comments? Email us at marketinsider@cnbc.com

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