(Fixes 3rd bullet point to show indexes ended lower and corrects next-to-last paragraph to remove reference to gains)
* Cisco suffers worst day in 16 years
* Short-term indicators suggest bullish trend remains
* Dow off 0.7 pct, S&P off 0.4 pct, Nasdaq off 0.9 pct * For up-to-the-minute market news see [STXNEWS/US] (Updates to close, changes byline)
By Angela Moon
NEW YORK, Nov 11 (Reuters) - Cisco's discouraging outlook dragged Wall Street lower on Thursday, but the market fought back in a sign the bullish trend remains intact.
Cisco
"This is a recipe for disaster but the fact is, the market is doing pretty well," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
"The market is exhibiting considerable strength here, considering the run we've had in the past few weeks, negative news out of Cisco, and the dollar doing well."
In the past, major averages have taken a bigger beating the day after Cisco's earnings disappoint.
Short-term technical indicators suggest the stock market is still in an uptrend, and options action in Cisco reversed earlier bearishness as traders moved to rebuild bullish positions.
"There was a panic sell-off initially (on Cisco's outlook) but people are starting to realize that maybe this is just a Cisco-specific story," Massocca said.
Cisco stock suffered its worst one-day percentage drop since July 14, 1994, when it slid 17.71 percent, according to Thomson Reuters Datastream. However, Cisco's decline accounted for more than half of the losses in the Nasdaq 100 Index <.NDX>.
The Dow Jones industrial average <.DJI> fell 73.94 points, or 0.65 percent, to 11,283.10. The Standard & Poor's 500 Index <.SPX> shed 5.17 points, or 0.42 percent, to 1,213.54. The Nasdaq Composite Index <.IXIC> lost 23.26 points, or 0.90 percent, to 2,555.52.
Cisco's warning dragged down shares of other tech
heavyweights. Microsoft Corp
More than 531 million shares had traded in Cisco, the fourth busiest day in the stock's history, according to Thomson Reuters Datastream. For a factbox, see: [ID:nN11276461]
Cisco's disappointing outlook came as the market's recent rally lost steam. Tech shares have led that rally, with the S&P information tech index <.GSPT> up about 21 percent from the end of August, compared with the S&P 500's gain of about 16 percent.
The day's decline has helped the market recover from an overbought condition, with the smoothed relative strength index (RSI) at about 63, off a recent high of 78.
Technical indicators showed that Cisco's stock was oversold, but the moving average convergence-divergence (MACD) triggered a "sell" signal. Momentum dropped to its lowest in 2-1/2 months.
Thursday's tumble took Cisco's stock below its 14-, 50-
and 200-day moving averages. The stock stayed above the year
low, which could provide some technical support. On a closing
basis, the year low stands at $19.99 on Aug. 31.
For graphics on Cisco, please see: http://r.reuters.com/jyc84q http://r.reuters.com/sam94q
For a BREAKINGVIEWS, see [ID:nN11130393]
For a FACTBOX, see [ID:nN11276461] and [ID:nN11134054]
For a Take a Look, see [ID:nN11128026]
Cisco's and the broader tech sector's sell-off pointed to the need for diversification, said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management in Parsippany, New Jersey, which has about $300 million in assets under management.
"Investors should look to build more diversification in their portfolios, relying not just on normal bellwethers like tech," Mahn said. "I'd recommend people look to places like small-caps, emerging markets and different kinds of bonds."
In the options market, many investors took positions betting on the recovery in Cisco's shares.
"It seems a number of options traders see the new value of the shares as attractive and ripe for harvest," said Caitlin Duffy, options strategist at Interactive Brokers Group.
More than 1.03 million option contracts have changed hands on Cisco Systems, with investors favoring calls over puts in afternoon trade.
Trading volume was about 7.8 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared with the year-to-date daily average of 8.72 billion.
In spite of the major stock indexes ending Thursday's session off the day's lows, the market's breadth was decidedly negative.
About 19 stocks fell for every 10 that rose on the New York Stock Exchange, while on the Nasdaq, about 17 stocks fell for every nine that rose. (Reporting by Angela Moon; Editing by Jan Paschal)