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Finally we got a little bout of profit-taking on Thursday. Cisco (CSCO) appeared to be the straw that broke the rally camel’s back, but anxiety over the economic outlook was a major concern after the outsize Fed rate check raised a little alarm. Basically, everybody knew that the market was a bit overbought, so almost (but not quite) everybody backed off buying.
Half of the Nasdaq loss occurred right at the open due to pre-market trading. The other half occurred by 12:10 p.m. There was no net change for the rest of the afternoon. That strongly suggests that there wasn’t much in the way of net ‘real’ selling, at least in the afternoon.
Part of the ‘function’ of Thursday’s sell-off was to “fill the gap” created at the open on Monday. We managed to fill the top half of the gap, so traders will want to see the market eventually trade down to fill the rest of the gap (down to 1360). That may or may not happen immediately. It also depends on whether there is any news and ‘real’ buying (or selling).
Volume was moderately light (1.7 billion shares). Breadth was lousy, with 2 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net buyers of Cisco (CSCO), Sun (SUNW), Intel (INTC), Nextel (NXTL), Oracle (ORCL), Altera (ALTR), Brocade (BRCD), EMC (EMC), and Sprint PCS (PCS).
The Unemployment Insurance Weekly Claims report registered a moderately sharp decline in initial claims, a modest rise in continuing claims, a slight rise in the 4-week moving average of initial claims, and a modest decline in the 4-week moving average of continuing claims. This was a somewhat positive, but mixed report. Unfortunately, the unadjusted, actual data showed a moderate rise in both initial and continuing claims. The 4-week moving average of (seasonally adjusted) initial claims is hovering just above the 400,000 threshold, so there is no clear indication as to whether the overall economy is shedding or adding jobs. My opinion is that initial claims need to be below 375,000 for solid employment growth, and above 450,000 to indicate overall employment contraction. So, we’re in a limbo state with a lot of high-end, high-profile jobs (tech workers and investment bankers) still being lost, but enough lower income jobs are being added to more than balance the losses.
The Productivity and Costs report for Q3 registered a sharp rise in productivity growth and a modest rise in labor costs. This was a positive report. Higher productivity means that a given amount of output can be produced with fewer workers, so until output begins to grow faster than productivity growth, labor markets will stagnate somewhat.
The Bank of Tokyo-Mitsubishi (BTM) Chain Store Sales Index for October registered a moderately sharp gain, twice the expectation. This was a positive report. Cooler weather was given as a primary cause of the rise.
The Consumer Credit report for September registered a sharp rise in consumer debt. This is a somewhat positive, but mixed report since consumers continue to spend, but are running up their debt. There is a lot of dispute over whether consumer debt levels are excessive. Also, there is a lot of volatility in this report.
The Wholesale Trade report for September registered a modest gain in sales, a moderate gain in inventories, and a repeat of the record low inventory/sales ratio. This was a positive report, but it was disappointing that sales were not stronger.
The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is still uncertain whether the recession has truly ended or whether the end was merely temporary with a second dip to follow. The twin problems right now are that employment growth is roughly flat and industrial production has dipped slightly. In their latest statement dated November 5, they say: “The U.S. economy continues to experience increases in production and income with slight decreases in employment. According to currently available data, real personal income has generally been growing over the past year, but fell slightly in July and rose slightly in August. Employment grew modestly from May through August 2002, but declined by small amounts in September and October. The behavior of the economy in the first eight months of 2002 indicates that the decline in activity that began last year may have come to an end. But recent data indicate that additional time is needed to be confident about the interpretation of the movements of the economy last year and this year. The NBER's Business Cycle Dating Committee will determine the date of a trough in activity when it concludes that a hypothetical subsequent downturn would be a separate recession, not a continuation of the past one. The trough date will mark the end of the recession. The committee will not issue any judgment about whether the economy has reached a trough until it makes its formal decision on this point. The committee waits for many months after an apparent trough to make its decision, because of data revisions and the possibility that the contraction would resume. For example, the committee waited until December 1992 to announce that a trough had occurred in March 1991.” Their definition of a recession is: “a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”
After the close: AMG Data Services reports that for the week ended Wednesday, November 6, $765 million flowed into equity funds. This was a positive report. This was not a dramatic level of inflows, but it does show that retail investors have not given up on the stock market. International and small-cap growth/value funds received most of the inflows. Amazingly, $218 million flowed into technology funds, the largest inflows since April 17. $2.0 billion flowed into taxable bond funds. $41 million flowed into municipal bond funds. $42.8 billion flowed into money market funds.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 2.32% on Thursday to 35.28, which is just above the bottom of the very high anxiety zone (35 to 40). That was a rather mild rise in anxiety considering the suddenness and sharpness of the sell-off. That suggests that people feel that the sell-off was merely a temporary adjustment and not a sign of things to come.
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 positive tone for the Thursday evening session, closing up 3.05 points. People believe that the sell-off was overdone, and were pleased with QUALCOMM’s (QCOM) quarterly results and outlook.
Fed funds futures suggest a 9% chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the December 10 FOMC meeting.
Fed funds futures suggest a 20% chance of a quarter-point rate cut by the January FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the January 28/29 FOMC meeting.
The dollar fell moderately against the yen and fell sharply against the euro. Traders are adjusting to the change in interest rates; this could take a week to settle down.
[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.
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 moderately sharply.
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.
Today may finally be the day that the Iraq resolution gets finalized by the UN Security Council. There is an expectation that an advance team of inspectors will be in Iraq within two weeks. My expectation is that there will be a continual stream of mini-crises as Iraq tries to evade compliance, but ultimately caves each time well before the U.S. gets a chance to use military force. Iraq feels a need to be seen by its fellow Arab states as standing up forcefully to the U.S.
[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.
Click here for our more extensive commentary on Technology.
The various parties to the antitrust settlement (Microsoft, DOJ, nine settling states) are expected to inform the court today that they accept the change proposed by the judge to explicitly grant the judge jurisdiction to oversee the implementation of the settlement over the next five years.
The non-settling states are still mulling over the question of whether to appeal the decision in the litigated portion of the case.
[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.
Did the Fed cut rates aggressively to head off deflation? Sure, but that’s not to say that the risk of deflation was very high at all. Since inflation is low and growth was slow, it was a no-brainer for the Fed to go ahead and cut rates. Mostly the cut was a form of insurance to get the recovery moving a little faster so that employment would rise more strongly and fewer people would be laid off in coming months. There is virtually no chance of the U.S. turning into a repeat of Japan.
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 $18.
It’s Friday again, so traders will tend to close out positions ahead of the weekend.
The market still needs more time to fully digest the Fed rate cut and to adjust asset allocation accordingly. Wednesday was a day of confusion, Thursday was a day of anxiety, so today will be the day for calm reflection.
I would expect the market to try to bounce after the excessive sell-off on Thursday and the good news from QUALCOMM, but traders may also insist on trying to finish filling the gap left over from Monday’s open.
[UPDATED 10/21/02] The rally has had a good run, so any profit-taking is to be expected. But the rally will continue to run as long as there are people willing to believe that maybe this time the rally will last.
[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 -40 to +60. Nasdaq came in at -42 on Thursday, well above the lower end of my range of -60 to +60. 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 11/8/02] The rally is now 21 days old. That’s quite impressive, even after Thursday’s profit-taking. I’ll give the market nine 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 move back above 1400 within a couple of days. Nasdaq also needs to break above 1420/1425 within a week and stay there for a week. Gaining – and keeping – the 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 11/8/02] The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is still uncertain whether the recession truly ended of whether the end was merely temporary with a second dip to follow. In their words (as of November 5), “The behavior of the economy in the first eight months of 2002 indicates that the decline in activity that began last year may have come to an end. But recent data indicate that additional time is needed to be confident about the interpretation of the movements of the economy last year and this year.”
[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 08, 2002 12:31:57 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology