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The moderate Nasdaq rally on Wednesday seemed driven by the hefty Fed rate cut. Although Nasdaq-100 futures had been up overnight based on the prospect of a Republican Congress and the resignation of SEC Chairman Harvey Pitt, there was no follow-through buying until after the Fed FOMC announcement. Cisco’s looming quarterly report probably also kept enthusiasm down.
Volume was heavy (2.1 billion shares). Breadth was reasonably positive, with 1.73 gainers for each loser. The heavy volume with a modest rally suggests a riptide where some people are buying to get aboard the train while others are frantically bailing out. It certainly seemed like there was a lot of “sell into the rally” and “buy the rumor, sell the news” selling. There was probably also a large amount of frantic day trading (capitalizing on the volatility) that resulted in little net change.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), Sun (SUNW), Intel (INTC), Oracle (ORCL), Nortel (NT), EMC (EMC), and Lucent (LU), but net buyers of Brocade (BRCD) and Nokia (NOK).
The weekly Mortgage Bankers Association (MBA) Mortgage Applications Survey registered a sharp gain, with a sharp gain in applications to purchase as well as a sharp gain in refinancing. This was a positive report. The index is off recent highs, but still showing real strength in demand for mortgages. There is still uncertainty as to how many applications are for second or third opinions versus those that actually close. In any case, demand for housing is still strong.
The Fed FOMC view of the economy: incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment. There really wasn’t any new news about the economy in the Fed announcement. There was no special knowledge that the Fed had that the rest of us didn’t have. The larger half-point rate cut does not mean that the economy was in worse shape than we thought. The economy is growing, but at a sub-par pace that would ramp up much slower than many people would like. This Fed cut offers the prospect of accelerating the pace of growth so that the unemployment rate begins to fall at a reasonably fast rate rather than at an uneven snail’s pace.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 0.58% on Wednesday to 34.48, which is near the top of the high anxiety zone (30 to 35). Once again, we see VIX up as the market moves up, suggesting that people have a deep distrust that the rally will continue, and may reverse and threaten their portfolio gains. VIX did spike above 36.5 several times as the market showed some weakness before the FOMC announcement, suggesting that people were worried that either the Fed would disappoint them or that the market would do a “sell the news” sell-off. VIX spiked to its highest level of 36.67 as the market fell sharply shortly after the FOMC announcement. The bottom line is that people are quite hopeful that the rally will continue, but still very concerned that the darn thing might quickly fall apart.
The high level of VIX remains a contrarian bullish indicator, but the market could decline further before rallying again.
The Nasdaq-100 After Hours Indicator had a negative tone for the Wednesday evening session, closing down 10.63 points. The tone had initially been quite positive as Cisco reported decent quarterly results, but turned downward as Cisco warned of possible weakness in Q4.
The Fed gave us a half-point cut and a neutral bias, so that erases the prospect of any interest rate changes for the rest of the year.
The Fed rate cut falls in the ‘insurance’ and ‘psychology’ categories rather than being based on true economic fundamentals. The Fed effectively said that the economy is growing, but too slowly. They explicitly said that “the risks are balanced” with respect to the Fed’s twin goals of price stability and sustainable economic growth. For the risks to be balanced, that would imply that the Fed thinks there is growth already happening. People believe that a recovered economy should be growing at a sustainable 3.5% GDP growth rate, but we haven’t been able to sustain that yet and people had been expecting Q4 to be quite weak.
The dollar fell modestly against the yen and euro. The euro finally managed to close modestly above parity. The Fed rate cut makes the dollar somewhat less attractive since U.S. fixed income securities will now have a lower return.
[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 moderately, and is well below the psychological $30 level. There is so much excess oil and oil capacity due to the sluggish economy that even the Iraq “war premium” can’t keep the price up.
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 fell 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. There may continue to be attacks or alleged attacks abroad, but the U.S. “homeland” may be relatively immune, at least for now.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
There is still a reasonable expectation that the U.S. will deliver a revised Iraq resolution to the UN Security Council in time to vote by the end of the week. Word is that the French have effectively agreed, but they still want to haggle over the wording just a little more.
[UPDATED 10/11/02] 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.
Microsoft has finally taken the wraps off its long-awaited “Tablet PC”. Critics have immediately concluded that there is no real market for the new computer. My attitude is to let the real market rather than the analysts, strategists, experts, and pundits decide. Let real users play with the machine and come up with their own novel applications. Also, it may be like the PocketPC, and take three releases before it really takes off. Microsoft should be praised for trying to do something new and different, not scoffed at.
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.
Cisco gave us very conservative guidance for Q4. That’s what companies have to do in today’s market environment. That said, there is every reason to believe that Cisco will meet or exceed that conservative revenue guidance. In other words, although Cisco’s guidance was not rosy, it wasn’t gloomy either.
No activity.
Reaction to Cisco’s quarterly report will be the order of the day. It could go either way. People might have been assuming that Q4 would be so-so, or they may have been hoping that CEO John Chambers would say that The Great Tech Winter is finally over. Traders may have run up the stock in advance of the news and simply sell it off in a classic “buy the rumor, sell the news” manner. The analysts will tell us whether the company is doing okay or not. It may take a while for money managers to digest the details before deciding to hold, sell, or buy.
Maybe the disappointment over Cisco will finally give the market a chance to have a decent “consolidation” sell-off. Or, we could see a sell-off at the opening and then a recovery rally if the selling does not accelerate.
The latest weekly unemployment insurance claims report will provide yet another piece to the economic puzzle.
[UPDATED 10/21/02] Market participants will continue to position themselves based on their expectations for Q3 results and Q4 guidance. Market reaction is frequently very unexpected. Sometimes stocks will fall on good news, and other times they will rise on bad news. It’s all a question of where the quarterly results and guidance come in relative to the expectations of each individual trader and investor. And many traders will simply trade in the direction they think the market seems to be trending shortly after news comes out. Meanwhile, institutional investors, hedge funds, pension fund managers, and mutual fund managers will be deciding whether they think the real earnings up-cycle is finally less than two quarters away. Sitting in cash may preserve capital, but people don’t pay most money managers to earn little better than money market rates (minus hefty fees).
My forecast for today is that Nasdaq will close in the range -60 to +60. Nasdaq came in at +18 on Wednesday, moderately above the midpoint of my range of -50 to +70. 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 11/7/02] The rally is now 20 days old (one full trading month) and at a new closing high. That’s quite impressive. I’ll give the market ten more days before concluding whether we’re truly back to a bear market or just in a trading range (or, heaven forbid, starting on a new bull market). Now that Nasdaq has broken above 1350, it will have to stay above that level for at least a week before people will be willing to suggest that this rally has staying power, and that would just be the next step. The 1400, 1425, and 1450 levels will be significant tests for this rally. Nasdaq will need to break above 1450 within the next three weeks and stay there for a week before we can cautiously talk of a real chance of a new bull market. Nasdaq needs to stay above 1400 for a week. Nasdaq also needs to break above 1420/1425 within a week and stay there for a week. Gaining – and keeping – the few points to get us above the peak of the August rally will be both quite a struggle and quite a milestone. The real stumbling block is 1423.19, which was the closing level on September 21, 2001 and marked the “bottom” that year. Trying to break above the bottom from below is technically very difficult. This has nothing to do with economic fundamentals, but in a market where people are quite anxious, the behavior of traders guided by technical analysis is a driving force until some more ‘real’ buyers step in.
[UPDATED 9/25/02] Technically, we are back in a bear market (as of Monday, 9/23) since we have broken below the July 24 low. But whether we continue downwards depends on whether the recent declines were driven by ‘real’ selling or simply due to short-selling. Short-sellers do eventually have to buy their borrowed shares back. The lofty level of the market Volatility Index (VIX) suggests that professional investors are bracing for the worst. That sounds bad, but frequently, those precautions are a harbinger of a turn in the market. The only question is whether the turn occurs within the next few days, a few weeks or a few months.
[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 10/21/02] The economy is looking even more mixed than before. Although there are plenty of signs of weakness, there are increasingly tantalizing tidbits of improvement. Here in New York, street traffic and business in restaurants has dramatically picked up. In fact, quite a number of new restaurants have opened, with more on the way. And this is despite the weakness on Wall Street. In Q3 tech profits and Q4 guidance, there is certainly a fair amount of weakness, but there have also been quite a number of bright spots, even if they are small bright spots. I suspect that a number of companies did their best to get as much bad news out as possible so that Q4 would be as strong as possible. I also went back and looked at the September Employment report and noticed that the loss of 43,000 non-farm payroll jobs was actually a 478,000 gain once you remove the seasonal adjustment. It turns out that the change from August to September varies widely over the years, so the seasonal adjustment is rather harsh. And finally, the 400,000 “threshold” for initial unemployment claims is not as hard a boundary as it seems, and 401,000 to 425,000 over the past seven weeks probably does not indicate a true employment contraction since the population and workforce have been growing over the years since the 400,000 rule of thumb was concocted. The bottom line is that the economy is hanging in there and even growing a little, even if it is not up to its full potential.
[UPDATED 11/7/02] I’ve decreased my estimate of the probability of a double-dip recession to 10% (from 20%) due to hefty half-point Fed rate cut. 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 11/4/02] I don’t yet have a forecast for Q4 GDP. The accounting is so inscrutable as to defy any rational forecast. People expect economic activity to slow dramatically from the pace of Q3, so GDP growth in the range of 0.5% to 2.5% (midpoint is 1.5%) is possible.
[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: November 06, 2002 11:58:15 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology