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(Will be updated for Monday)
It shouldn’t have been any surprise that the market fell on Friday, but it really did feel like it should have gone up. Oddly, it may have been two pieces of good news that sent the market down. The employment report was fairly decent, but that means that a Fed rate cut is less likely and a lot of traders seem to believe that the market should go up only when a rate cut looks likely. The good news on Iraq was that the U.S. softened its stance on the requirements for getting the inspectors back into Iraq, but traders seem to think that any delay in starting a war is bad for the market.
Volume was light (1.58 billion shares). Breadth was terrible, with 2.36 losers for each gainer. A decline (or gain) on light volume is not particularly significant.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a moderate decline as did its six-month smoothed growth rate. This was a negative report. Unfortunately, the WLI is now suggesting some economic weakness in the months ahead.
The Employment Situation report for September was mixed, with payroll employment dipping modestly, but the unemployment rate dipped modestly, and overall employment rose moderately, as did the average workweek and the average paycheck. Overall, this was a slightly positive, but mixed report. Although payroll employment dipped, that was after the modest August gain was revised moderately higher. This report does not indicate great growth, but it doesn’t indicate significant weakness either. The U.S. population continues to grow, the overall workforce continues to grow, and the rate of participation in the workforce continues to increase. As long as overall employment grows in conjunction with growth in the average paycheck, there will be increasing cash for consumers to spend, save, and invest.
The OECD Composite Leading Indicators (CLI) for August registered a moderate decline. This was a negative report, suggesting that growth will be slowing in the months ahead.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 2.94% on Friday to 46.28, which is in the lower half of the near-panic zone (45 to 50). Anxiety is quite high, so people are willing to pay a higher price to buy index options to protect their portfolios from further downside. There were some minor spikes, but nothing severe enough to signal a capitulation. VIX had double peaks around 47.20 at 1:55 p.m. and at 2:40 p.m., corresponding to the market low points.
VIX is a contrarian bullish indicator, so a strong bounce is due any day, but there is no way to tell whether the market could go even lower before that bounce.
The Nasdaq-100 After Hours Indicator had a slightly positive tone for the Friday evening session, closing up 0.38 points, basically flat. People believe that the sell-off was overdone, but given the fierceness of recent negativity, people are reluctant to stick their necks out too far, yet.
Fed funds futures suggest a 70% (down from 100%) chance of a quarter-point rate cut in November. In other words, futures indicate that the Fed will cut rates at the November 6 FOMC meeting.
The almost-reasonable employment report convinced traders that the economy isn’t in quite as bad shape as they had thought.
December is still too far away for futures to reliably predict the actual fed funds rate (according to studies that the Fed itself has done.)
[UPDATED 9/25/02] I forecast that the Fed will hold interest rates steady through the Fall election (November 5) and likely through the November 6 FOMC meeting as well, unless some dramatic, new, unforeseen crisis erupts.
The dollar rose moderately against the yen and euro.
[UPDATED 7/23/02] There are still no signs of any economic fundamentals that would make either Europe or Japan dramatically more attractive than the U.S. for long-term investment. Rather, the relative weakening of the dollar has been primarily driven by speculative currency trading and sentiment (such as the accounting scandals) and that sentiment will most likely reverse over the coming months as the forces depressing sentiment dissipate.
In any case, the dollar is still quite sound and no true investor should lose any sleep worrying about potential negative implications from a weaker dollar. And, a weaker dollar will boost U.S. exports.
The price of oil fell modestly, and is still slightly slightly below the psychological $30 level for a second consecutive day. The decline was due to relief that oil production and refining was starting up again after hurricane Lili and relief that the U.S. was softening its hard-line stance against arms inspectors for Iraq.
In any case, the price of oil price continues to be well-behaved and no true investor should lose any sleep worrying about it.
The price of gold rose modestly.
In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
The relative calm continues.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The eerie calm continues.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The White House seems to be changing its tune and may agree to a UN resolution similar to what has been proposed by the French. It’s not clear if the U.S. would still demand that all Iraqi presidential palaces be opened for inspection immediately, and whether Iraq must turn over full documentation for all the weapons we think they possess before any inspectors go into Iraq.
President Bush will “address the nation” on Monday evening on the topic of Iraq. His speech will likely have two purposes: to try to convince the American people that there are good reasons to deal with Iraq and to set the tone ahead of the congressional debates on the proposed congressional resolution. There will be quite a number of Democrats (and a few Republicans) who will speak out quite forcefully against going to war with Iraq at this time. The President would like to persuade them to soften their tone, or to at least steal some of their thunder. An implicit purpose of the speech is to send a crystal clear message to Iraq and its neighbors that we really, really, really mean business and if Iraq’s neighbors fail to convince Iraq to disarm, then within 18 months Iraq will have become a western-friendly democracy.
The Israelis think that the U.S. will attack Iraq as early as late November, but it is sometimes difficult to interpret what the Israelis mean. They could simply mean that Israel still has plenty of time to prepare (for potential missile and terrorist attacks) since the war would not occur before the end of November.
My assessment remains that there is virtually no chance of an all-out military conflict with Iraq this year and only a 20% chance next year.
[UPDATED 9/16/02] The bottom line is that investor concern over the sluggish economic recovery and weakness in corporate revenue and earnings growth still weigh more heavily on the market than all the other non-economic factors. Traders merely use Iraq, et al as excuses for any market weakness.
Click here for our more extensive commentary on The Iraq Problem.
Click here for our more extensive commentary on Technology.
No activity.
[UPDATED 8/5/02] Check out our book list.
Absolutely nothing more is needed at this point other than to simply let the current market-driven corrective processes play themselves out.
Click here for our more extensive commentary on financial reform.
Click here for our more extensive commentary on The Telecom Problem.
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I made my weekly dollar-cost-averaging purchase of January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $14. Curiously, the price was moderately higher than a week ago when XLK was at a moderately higher price. This suggests that demand for the options is greater, possibly on speculation that we are finally getting close to rock bottom. That has no affect on my investment plan, but it is an interesting piece of information about perception in the market, and perception is everything, at least most of the time.
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My forecast for today is that Nasdaq will close in the range -30 to +80. Nasdaq came in at -26 on Friday, moderately below the lower end of my range of -20 to +80. The market continues to be so crazy that it could go either way, but I still believe there is a longer-term upwards bias even if the near-term bias is all over the map.
[UPDATED 10/5/02] The market is poised to slide back into a bear market, but it will take another week or so to be sure.
[UPDATED 8/22/02] The incredible level of disbelief in the current rally strongly suggests that a contrarian bullish view may be appropriate. It’s the exact flip-side of where we were in April and May of 2000 when people refused to belief that the bull market was over and that a bear market had begun.
[UPDATED 6/24/02] Regardless of how crazy the market behaves, the economic recovery is well underway. Market participants may not yet be ready to acknowledge the recovery, but it is inevitable, even if the timing is uncertain. There are more than enough differences in the current market cycle than any in recent memory, but inevitably the market will rise as people anticipate earnings growth down the road. Investing for the long term is still an excellent strategy even if it feels painful in the near term.
[UPDATED 6/24/02] The market will rally when the selling peters out. The market religiously obeys the law of supply and demand, but many buyers have a habit of waiting until the sellers exhaust themselves.
[UPDATED 9/14/02] I’ve decreased my estimate of the probability of a double-dip recession to 20% (from 25%) due to higher retail sales in August. I still think a double-dip is unlikely, but I do want to quantify my beliefs as well as risks.
[UPDATED 6/24/02] There is absolutely no question that the economic recovery in the U.S. is going at a somewhat slower pace than had been expected by this point in time, but the recovery is well along nonetheless. We are still winding our way through an extended turning point, but virtually every day brings news that we are making incremental progress, even as there are still plenty of negative data points as well. Impatient observers fail to recognize that turning points are bumpy affairs and that negative data points do not necessarily mean that something has gone wrong.
[UPDATED 6/24/02] Spending on technology has picked up only modestly, at best. And the telecom sector continues to decline. That said, the recovery is in fact well along, with the manufacturing sector leading the way. Manufacturers have plenty of excess capacity so that they can increase production without spending too much and without needing to hire many workers, yet.
[UPDATED 6/24/02] Even as unemployment continues to rise modestly, actual employment has already begun to rise, although at a very modest pace. The average paycheck has also been rising, and at a rate faster than inflation. That combination of more people working with larger paychecks means that overall national income is rising, which is a very good thing and will continue to fuel consumer spending.
[UPDATED 6/24/02] Companies are reluctant to dramatically increase their spending on technology until they become more comfortable that ‘final demand’ is increasing at a dependable pace. Demand is increasing, but at a slow enough pace that companies are proceeding with great caution. But as each day goes by, an additional increment of that caution evaporates. It may be as painful as watching grass grow or watching paint dry, but investors can be sure that their patience will be rewarded. Sure, it will take some time to get back to ‘normal’, but that result is inevitable even if the timing is uncertain.
[UPDATED 9/10/02] I still don’t have a forecast for Q3 GDP. The accounting is so inscrutable as to defy any rational forecast. At this point it does feel like Q3 is moderately worse than Q2, but the crazy accounting could take it either way. A Reuters poll of economists places Q3 GDP growth around 3%.
[UPDATED 6/24/02] Although the end of the recession has not been officially ‘called’ yet (by the National Bureau of Economic Research), March is the most likely candidate for the ending month of the recession since that was the last month that showed declining employment. Industrial production’s last decline was in December.
[UPDATED 8/14/02] We are still in the turning point where the view in front of your nose is mixed and confusing. Recent economic reports have been weak or mixed, so we probably need another month of data to be able to see where we are going. For me personally, it’s a no-brainer that we very close to the final edge of the turning point, but so many people have lost confidence that they need a truly monumental level of evidence to believe again. But that’s always the way it is with turning points: it’s darkest before the dawn.
[UPDATED 8/24/02] I’ve reset the Tech Stock ‘Safe’ Signal back to 0.00 since it has the last change is over six weeks old. There needs to be a sense of ‘freshness’ to the outlook for tech business that simply isn’t there right now.
[UPDATED 8/24/02] Our ‘safe’ signal requires at least 20% (1 out of 5, or 10 out of 50) of the top 50 tech companies to signal acceleration. Expect one or two quarters to elapse from the time of the first indications of an upturn and the return of solid growth. The theory is that the stock market should begin a sustainable rally four to six months in advance of the return of strong growth. Many companies are still trimming Q3 forecasts, and virtually nobody is beating the drum for a great Q4. A lot of people are saying that even Q1 of 2003 will be sluggish. That said, if you want to get the early stock market gains, you'll have to jump the gun and get in before our signal triggers. But if you do, you have to be prepared for some significant volatility and possibly some big losses. You have to decide for yourself whether you want safety in the short run or higher potential returns in the long run.
[UPDATED 9/14/02] For our complete list of resources, click here.
[NEW 5/25/02] DISCLAIMER: I cannot and do not offer any recommendations of stocks to buy or sell. I may on occasion discuss companies that I am considering or myself have bought or sold, but the reader must do their own research before making their own purchase or sale decision. It is never a good idea to buy a stock just because someone else tells you to or even merely mentions a company in a favorable light.
Jack Krupansky -- The Unrepentant Optimist (Click here for Jack's Bio)
Updated: October 05, 2002 12:33:56 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology