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(Will be updated for Monday)
Friday was a moderate day of profit-taking, but nothing excessive.
Traders managed to “fill the gap” from the open on Monday. At least that technical ‘necessity’ is now out of the way.
The low for the day was around 11:35 a.m. The closing level was reached at 11:15 a.m. The entire rest of the day was in a fairly tight trading range. 1355 seemed to provide support and 1365 seemed to provide resistance.
Nasdaq bounced a little in the early going, but was roughly flat at 10:55 a.m. That means that the total loss for the day occurred in a mere 20 minutes. What a slow, boring market. There was virtually no sign of any ‘real’ selling.
There has been some suggestion that the market is unhappy with the Iraq resolution and thinks that it increases the odds of war. That may be what the market thinks, but the reality is that the unanimous vote dramatically decreases the chance of war since Iraq can clearly see that even its neighbor Syria voted with the U.S. In any case, the early bounce did fall apart shortly after the UN vote was announced.
Volume was light (1.6 billion shares). Breadth was moderately negative, with 1.3 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of QUALCOMM (QCOM), but net buyers of Sun (SUNW), Oracle (ORCL), Cisco (CSCO), Intel (INTC), Brocade (BRCD), EMC (EMC), Applied Materials (AMAT), and Nextel (NXTL). There was nothing here to suggest that people were abandoning the rally.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp gain, and its six-month smoothed growth rate rose moderately and has now risen for two consecutive weeks. This was a positive report, but we need to see a longer string of gains before presuming that stronger growth is assured in the months ahead. The WLI growth rate is still fairly negative and recent WLI reports were actually revised downwards as well. But, however deep the hole was, the recent trend is up.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 4.88% on Friday to 33.56, which is in the upper half of the high anxiety zone (30 to 35). It’s very unusual to see a significant drop in VIX on a day when the market declines. But, it’s also not too uncommon to see VIX behave a little oddly on a Friday. In any case, the decline in VIX suggests that people are somewhat relieved that the sharp sell-off on Thursday moderated dramatically on Friday. VIX fell sharply as the market rallied in the first hour of trading, but then rose more sharply as the bounce reversed and turned into a further sell-off. VIX trailed off as the afternoon wore on in the face of a failure of additional selling pressure to materialize.
From the behavior of VIX on Friday, it looks like people are ready to believe that the rally has a good chance of continuing. But, they’re not going to bet the farm on it.
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 Friday evening session, closing down 1.12 points. I was unable to discern any news that would account for the decline, but it was a very modest decline anyway.
[This is the data as of noon on Thursday. My data source was AWOL on Friday!]
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 sharply against the yen and fell moderately against the euro. The euro is now firmly above parity. This is mostly just part of the process of adjusting to the Fed rate cut and may take a couple more days to settle. It will probably overshoot equilibrium (due to momentum traders), but then settle back to a more rational level.
[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 rose moderately, but is still well below the psychological $30 level. Some speculators mistaken believe that passage of the new Iraq UN resolution increases the odds of war (and hence disruption of oil supplies). The resolution actually increases the odds of a peaceful resolution and means less of a chance of unilateral U.S. action.
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 slightly. Gold has been inching up, but is still well off the May high.
Note that there are three distinct reasons that gold could rise: safe haven bid during uncertainty, actual demand for the metal, and an expectation that the economic recovery (and inflation) may begin to take hold due to the aggressive Fed rate cut. The recent bid on gold may be due to uncertainty, but I suspect there is mostly just a lot of confusion in the gold market. There is a fair amount of talk about deflation, but commodities, including gold, are one of the worst asset classes to own in a deflationary environment.
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.
There is some talk of a coordinated, multi-national terrorist attack that might be coming up, but it’s unlikely that al Qaeda can pull off more than a bunch of isolated, fairly limited incidents, especially in the current heightened security environment.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
It was no surprise that we finally got a new Iraq resolution from the UN Security Council, but it was a (pleasant) surprise that it was unanimous, with even Syria voting for it. That has to be a very serious message to Iraq. The Iraqis had no initial official reaction, but their UN ambassador expressed some negative comments. They’ve done this many times before. It’s their M.O.: express some objections, but shortly later (and under intense pressure) capitulate.
Iraq has 7 days to agree to abide by the resolution. UN inspectors are expected back in Baghdad within 10 days. The next question is how long before the first problem and how big a problem will it be and how much effort will be needed to get past it. But, make no mistake: Iraq will keep on caving as long as we keep pushing. It will also be essential for the U.S. to continue building up military forces in the region so that our threat of force is extremely credible. Eventually there is a high probability that there may be some mini-crises where we actually have to use surgical strikes to ‘reinforce’ our resolve with the Iraqis.
There has been a lot of talk that this will be Iraq’s “final chance”. Nonsense. We’re embarking on a lengthy process. There will be no make/break points in that process. The U.S. talks as if there will be no give and take, but you can be sure that there will be plenty of give and take. It will be a messy process for sure, but few serious matters in life aren’t messy. Just think of it as a messy divorce with the husband being accused of hiding assets. We may never uncover all of Iraq’s military assets, but at some point we’ll reach the point of diminishing returns and simply settle for a monitoring operation that will prevent Iraq from using any proscribed military assets that it may still have.
[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 settlement have agreed to accept the judge’s demand that she be given explicit jurisdiction over the settlement. As previously written, the judge would have only gotten involved at the request of one of the parties. The settlement should finally be final within a couple of days.
[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.
The single biggest beneficiary of low interest rates will be the U.S. government which is now borrowing heavily due to a budget deficit. Low interest rates keep government interest expenses down.
It will be very interesting to see what the Fed rate cut does to mortgage rates and demand for housing. It may take a month or more to see the effect (or lack of effect), but it will be interesting. Also, there are separate effects for people buying homes and people simply refinancing at cheaper rates. I would not get my hopes up too high yet, but I wouldn’t write off mortgage demand yet.
No activity.
Maybe today we will see the bounce that we should have seen on Friday. We could see more of a sell-off as people continue to agonize over whether the rally is over.
There is also the question of whether many investors may asset allocate away from U.S. stocks and other dollar-denominated assets as a result of the aggressive Fed rate cut. But that could be balanced by the degree to which U.S. stocks look more attractive in a recovery scenario than fixed income (U.S. or otherwise).
There may be some lingering anxiety over Iraq as we wait for Iraq to reply to the new UN Security Council resolution. Nobody knows whether Iraq will respond promptly or wait until Friday.
[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 Monday is that Nasdaq will close in the range -30 to +60. Nasdaq came in at -17 on Friday, well above the lower end of my range of -40 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 11/9/02] The rally is now 22 days old. That’s quite impressive, even after profit-taking on Thursday and Friday. I’ll give the market eight 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). It’s quite a milestone that Nasdaq has managed to stay above the 1350 level for an entire week, but it will be important to stay above that level in the coming weeks. The 1400, 1425, and 1450 levels will be significant tests for this rally. Nasdaq will need to break above 1450 within the next two 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 11/9/02] The ECRI Weekly Leading Index (WLI) tells us that the economy is starting to pick up a little. Not enough to make people happy, but enough to offer encouragement that neither a double-dip recession nor deflation are in our cards.
[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 09, 2002 12:14:05 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology