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(Will be updated for Monday)
Nasdaq actually managed to squeak by with a slight gain on Friday when it would have been a safer bet to see some significant profit-taking after the strong rally on Wednesday and Thursday. But, you can’t conclude much from trading on a Friday since traders have to do a lot of position squaring ahead of the weekend.
The impressive thing is that the market held up despite the abysmal SEMI chip equipment report, as well as quite a number of analyst downgrades.
Traders did their best to try to push the market down with a 14-point decline on the open, but no additional selling pressing materialized. The market started rallying back within 10 minutes of the open. Traders made a number of attempts to push Nasdaq back down, but to no avail.
Volume was moderately heavy (1.9 billion shares). Breadth was modestly positive, with 1.18 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Cisco (CSCO), Intel (INTC), and HP (HPQ), but net buyers of Brocade (BRCD), Nortel (NT), JDS Uniphase (JDSU), EMC (EMC), and Dell (DELL). Institutions are clearly not ready to abandon the stock market.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a moderate gain (exactly reversing the previous week’s decline), and its six-month smoothed growth rate rose slightly and has now risen for three consecutive weeks. This was a slightly positive report. The WLI growth rate is still fairly negative. The WLI is suggesting anemic growth at best, and possibly some weakness in the months ahead. The negative WLI growth rate doesn’t necessarily indicate an economic contraction ahead, but simply that growth will be below what we would like to see in a robust recovery. All of this is subject to change on a dime as the real economy lurches forward at an uneven pace.
The Philadelphia Fed Survey of Professional Forecasters now forecasts Q4 real GDP growth of 1.3% (down from a forecast of 2.6% one quarter ago), and 2003 real GDP growth of 2.6% (down from 3.0%). This is a negative report, but well within the range of current expectations. Forecasters are expecting only a slight down-tick in unemployment in 2003. Forecasters estimate a 27% (up from 19%) chance that Q4 will have negative GDP growth and 24% (up from 16%) chance that Q1 will have negative GDP growth.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 2.34% on Friday to 26.73, which is in the lower half of the moderately high anxiety zone (25 to 30). People were relieved that the market held up on a day when significant profit-taking was expected. Note that VIX sometimes falls off on a Friday, but then picks up on the following Monday.
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 mixed, but modestly negative tone for the Friday evening session, closing down 0.48 points. This is the typical behavior on a Friday where people don’t have much reason to change their positions since the close of the day session.
Fed funds futures suggest a 12% (unchanged) 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 10% (unchanged) 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 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 rose moderately, but is well below the psychological $30 level. The stated reason for the gain was concern over Iraq, but it is more likely to have been short-covering and a growing belief that the U.S. recovery is picking up steam. Russia’s comments in support of Iraqi disarmament were treated as if they implied that war was increasingly likely, but the opposite is true: Iraq is getting increasing pressure to voluntarily disarm, so that war will be less likely.
The U.S. Department of Energy (DOE) says that the U.S. Strategic Petroleum Reserve (SPR) now contains over 593 million barrels of crude oil. And, it’s filling further as oil companies take advantage of lower oil prices to replace oil that they either borrowed earlier or in lieu of royalties on oil they have pumped from oil fields on federal lands. It can be drawn down at slightly over 4 million barrels a day for up to 20 weeks (five months). This is far greater than the amount needed to cover any anticipated shortfall if there was a supply disruption in the Middle East for even an extended period of time. This reserve is also a very strong incentive for oil exporters in the Middle East to avoid any supply disruption since it means than they lose all that income and gain no political advantage. The idea that oil prices will spike up to $40, $50, or even $80 on a war with Iraq is so patently absurd as to be laughable. It’s a perfect example of the kinds of games traders and speculators play to try to manipulate the market.
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 strongly.
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.
The waiting continues. The first group of 18 inspectors will arrive in Baghdad on Monday and are expected to begin inspections on Wednesday. There will be a fair amount of confusion for the first couple of weeks as everybody learns to walk again.
[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.
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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No activity.
The market is at a fork in the road where people need to decide whether to bet on a continuation of the rally or to bail out. There seems to be a substantial amount of sentiment in favor of continuing to pump money into the market.
There is still plenty of opportunity for profit-taking since Nasdaq is in a short-term overbought technical situation.
Trading could be quite volatile (wild swings up and down) since volume is likely to be light during the holiday week. Friday is a half day and many people will be leaving early on Wednesday.
My forecast for Monday is that Nasdaq will close in the range -40 to +40. Nasdaq came in at +1 on Friday, modestly below the midpoint of my range of -40 to +50. 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 11/23/02] The rally is now 32 days old and hanging in there. 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). Nasdaq has managed to close above 1350 for eight days, but we need to stay up there for at least another two days before we can start to have real confidence in the rally again. Nasdaq has closed above 1400 for three days, but needs to stay above that level for another four days. Now that Nasdaq finally was able to break above 1420/1425, it simply needs to stay there for at least a week. Remaining 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 11/11/02] 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 real GDP growth in the range of -0.5% to 2.5% (midpoint is 1.0%) is possible. Actually, a survey of economists by The Economist shows an expectation for real GDP growth in 2002 of 2.4% (low of 2.3 to 2.6), which implies Q4 GDP growth of 0.2% (low of -0.2 to 1.0). The same survey forecast real GDP growth of 2.7% in 2003 (low of 2.1 to 3.3). There was no hint or suggestion of deflation in these survey results.
[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 23, 2002 12:29:44 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology