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Finally, we had a decent day of profit-taking on Tuesday. Maybe it will continue for a day or two or three, but it’s always get to these things out of the way so we can move on.
Some market commentary suggested that the market weakness was due to the consumer confidence report being less than expected. It is certainly true that the market headed further south when the report came out, but the market already had a negative tone by that point and the report was close enough to the consensus expectation. It may have been that traders were betting on the report being even stronger than the consensus.
It may have been that there were simply enough little negatives to overwhelm the little positives and led people to believe that there was not a strong enough reason for the market to rally.
Once the downward trend started, there was little to reverse the trend. Ultimately it became a “throw in the towel” day, with people deciding to simply step aside and wait for the “carnage” to subside before wading back into the market.
There was a half-hearted attempt to recover between shortly after 11:00 a.m. after the morning low until about 12:20 p.m., but it petered out and Nasdaq then fell in almost a straight line into the close.
One factor that helped keep the market on a downward trajectory for the day was talk (reported on briefing.com) that two major Wall Street firms had reduced the stock allocation in their asset allocation models. There was no confirmation of this, but this kind of talk is a definite bucket of cold water on any market. If true, there could be some additional selling pressure over the coming week as clients adjust their portfolios to the new, reduced-stock allocation. These asset allocation “calls” are not uncommon and aren’t usually all or nothing 100% transitions. In all likelihood, the two firms (whoever they are) simply dropped their stock allocations by 5% or maybe 10%. It is not uncommon for different firms to move in opposite directions, so in the days ahead we could also see a firm go from 55% to 60% even as another firm goes from 70% to 65%. In any case, asset allocation calls are not necessarily fatal to a rally and provide a good test of how broad the market participation really is. It is best when everybody is marching to a different drummer. Ultimately, the true purpose of asset allocation calls is to generate commission and transaction income by periodically “suggesting” that clients buy or sell more stocks.
Some good tech news that got lost in the noise was that Micron (MU) reaffirmed its capital spending goal for 2003, which is about 10% higher than in 2002.
Volume was moderately heavy (1.9 billion shares). Breadth was moderately negative, with 1.59 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of EMC (EMC), Oracle (ORCL), Intel (INTC), Lucent (LU), and Qwest (Q), but net buyers of Sun (SUNW), Cisco (CSCO), Motorola (MOT), and Applied Materials (AMAT). Institutions were doing a lot of selling, but there was no clear, overwhelming bias towards selling.
The “preliminary” Gross Domestic Product (GDP) report for Q3 showed that real GDP growth was significantly stronger than previously reported and stronger than expected. This was a positive report, but it’s considered “ancient history” since everyone is so focused on weakness in Q4. The revised Q3 report does not change my Q4 forecast.
The New Home Sales report for October registered a moderate decline below the level of August and September, but still well above the July level. This was a slightly negative report, but new home sales are still quite strong.
The Conference Board Consumer Confidence Index for November registered a moderate gain, but is still below the September (and earlier) level. This was a positive report, but came in below expectations. The “present situation” component rose only moderately, but the “expectations” component rose moderately sharply. The employment outlook actually deteriorated. Whether the confidence gain translates into an increase in consumer spending is uncertain.
The Bank of Tokyo-Mitsubishi (BTM)/UBS Warburg Weekly Chain Store Sales Snapshot registered a moderately strong gain. This was a positive report, but there is a lot of volatility and the gain was somewhat less than the decline in the previous week. Sales were “generally on to below plan.”
The Mass Layoffs report for October registered a sharp rise in mass layoff events (50 or more workers) and a sharp rise in the number of people laid off. This was a negative report, but fortunately the overall size of the workforce and overall employment are rising at a fast enough pace to minimize the downside for the overall economy. This report covers people who actually filed to claim unemployment insurance, not announcements of layoffs.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a moderate decline to -19 from -17 (out of a range from -100 to +100). This was a negative report, but merely erases the previous week’s gain. There was a 3% decline in how people view the overall economy, no change in how consumers view their own finances, and a 1% decline in how consumers view the buying climate. As usual, consumer confidence reports are not leading indicators. This decline ends four consecutive weeks of up-trend. The weekly report tends to be somewhat volatile, so it will take a couple weeks to see if this negative report is just a blip, a minor dip, or a trend change. The good news was that consumer comfort with their own finances is holding up.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 6.64% on day to 28.74, which is in the upper half of the moderately high anxiety zone (25 to 30). The VIX rise corresponded closely with the market decline. There was no sense of panic, but people are concerned because they have difficulty telling the difference between a moderate amount of profit-taking and the beginning of the end of the rally.
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 Tuesday evening session, closing up 2.39 points. Novellus (NVLS) and Sun (SUNW) had reasonably good mid-quarter conference calls. Neither company is out of the woods, but business does seem to be stabilizing. Most importantly, neither company had any new big bad news to report.
Fed funds futures suggest a 15% (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 14% (up from 10%) 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 modestly against the 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.
[UPDATED 7/23/02] 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.
[UPDATED 7/23/02] 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.
[UPDATED 7/23/02] In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[UPDATED 7/6/02] The relative calm continues.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[UPDATED 10/14/02] 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.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
Today is the big day when weapons inspections finally begin in Iraq. Nobody has a clue how the process will unfold. For sure, there will be lots of tension and occasional mini-crises as everybody tries to figure out how the process should work. Two things are certain: Iraq does not want to give up anything unless it has no choice, and Iraq will give up whatever is required to avoid war with the U.S. No major confrontations are expected today, but the novelty of the situation will attract a lot of attention.
U.S. Senator Bob Graham (D-FL) says there is a 70% chance that the U.S. will be at war with Iraq sometime this winter. I disagree. It is my contention that the politicians and ‘experts’ in Washington have either seriously misjudged Saddam Hussein’s desire to stay in power or they are intentionally misrepresenting their private beliefs. I view this whole situation as a big negotiation, so it’s not unreasonable for the guys in Washington to overstate their case in an effort to induce Iraq to cave in. The real point Graham was making was that if we go to war with Iraq and if Hussein believes he is about to lose power, then we should expect that Iraq will “unleash” terrorist attacks against the U.S. This is all mostly unsubstantiated conjecture and the whole basis and line of reasoning is used to justify the ‘need’ for spending more money for the portions of government that the drum-beaters oversee. It is certainly good news that these people are not underestimating the threat of Iraq (as they did in 1990), but it is unfortunate that they are so grossly overestimating the odds that Hussein will suddenly become wildly deranged and go suicidal.
[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.
[UPDATED 7/23/02] 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.
…
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. The market obliged by giving me a down day to buy into.
Trading could be quite volatile due to the holiday tomorrow. A lot of traders may already be gone and others may leave early. Traders will tend to treat the holiday like a long weekend and close out positions since anything can happen, especially with the Iraq inspections starting up.
It will be interesting to see if any serious selling pressure materializes as a result of the alleged stock allocation reductions that briefing.com reported on Tuesday. People who have been in the market for some time may opt to take some profits, but others who haven’t been in the market for very long (and may not even know about the alleged asset allocation calls) may simply keep on buying if the Tuesday sell-off appears to be a one-day affair.
The big question is whether the August rally peak of 1423 will hold up. There is an excellent chance that it will hold up.
Reasonable mid-quarter conference calls from Sun (SUN) and Novellus (NVLS) may get the rally going again.
There are a bunch of economic reports out this morning that could “move the market”.
We’re getting near the end of the month, so there could be a bit of “window dressing” buying (or selling).
My forecast for today is that Nasdaq will close in the range -40 to +60. Nasdaq came in at -37 on Tuesday, modestly above the lower end 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 11/27/02] The rally is now 34 days old, but 1 day past its peak. 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 two weeks, so that level looks fairly solid. Nasdaq has closed above 1400 for five days, but needs to stay above that level for another two days. Now that Nasdaq finally was able to break above 1420/1425, it simply needs to stay there for at least another three days. 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. Nasdaq is not quite ready to take a shot at the 1500 level. It’s better for Nasdaq to consolidate a bit and attack from a position of strength rather than overreach to the 1500 level and then not be able to hold its ground.
[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 11/27/02] A panel of professional forecasters of the National Association for Business Economics (NABE) estimates that real Q4 GDP should grow at a rate of 1.4%. Q1 GDP should grow at a 2.5% rate. Full year 2003 GDP should grow at a rate approaching 3%. The survey was taken from November 9th to 14th.
[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 26, 2002 11:29:05 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology