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(Will be updated for Friday)
So much for profit-taking. Nasdaq gained back all of Tuesday’s losses on Wednesday, and then some. A bunch of good economic reports did in the sell-off. This suggests that a lot of the selling on Tuesday was shorting and those shorts were forced to cover on Wednesday. Renewed optimism from Novellus (NVLS) boosted the chip sector which in turn boosted Nasdaq. A lack of any negative news from Iraq on the first day of inspections was also a relief for the market.
Most of the Nasdaq gain was achieved by 10:25 a.m. Only another 5 points was gained for the entire rest of the day. The good news is that there wasn’t any serious selling pressure.
Nasdaq might have moved even higher, but there is plenty of technical “resistance” looming ahead. Most notably, the 1490 and 1500 levels will offer intense resistance. The Nasdaq 200-day moving average is now slightly below 1500 and will a tough barrier to surmount.
Volume was moderately light (1.7 billion shares). Breadth was very positive, with 3 gainers for each loser. The rally would have been more impressive if volume had been stronger.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sunw (SUNW), Cisco (CSCO), Intel (INTC), Oracle (ORCL), Nortel (NT), JDS Uniphase (JDSU), EMC (EMC), and Brocade (BRCD), but net buyers of Lucent (LU). Clearly the institutional guys were not in a buying mood.
The Personal Income and Outlays report for October registered a modest rise in personal income and a moderate rise in personal spending. This was a somewhat positive report, but had some weakness. Wage and salary income actually decreased slightly. Spending on durable goods fell, but all of that decline and then some was due to lower auto sales. There was a moderate rise in spending on nondurable goods. The bottom line is that consumers are still spending at a healthy pace.
The Unemployment Insurance Weekly Claims report registered a moderate decline in initial claims (well under 400,000), a moderate decline in the 4-week moving average of initial claims (moderately under 400,000), but a moderately sharp rise in continuing claims and a modest rise in the 4-week moving average of continuing claims. This was a positive, but mixed report. It’s a very good sign that initial claims are well under the 400,000 threshold which suggests that overall employment is growing. Unfortunately, the good news may be mostly due to favorable seasonal adjustments. The unadjusted, actual number of initial claims rose quite sharply to well over 400,000 and almost to the level of a year ago. Similarly, unadjusted, actual continuing claims rose quite sharply and are higher than a year ago. These numbers are subject to revision, especially due to the early reporting due to the holiday. Unfortunately, the report next week will be distorted due to the holiday. The sharp rise in actual claims may just be a fluke, and maybe for once the seasonal adjustment is meaningful. In any case, despite the dramatic volatility and seasonal adjustments, jobless claims are moderate enough to suggest that the overall labor market is holding together fairly well.
The Durable Goods report for October registered a moderate rise in new orders (substantially higher than expected) and a modest rise in shipments. This was a positive report. Orders for computers and related products dipped modestly (after a strong gain in September), but orders for communications equipment rose quite sharply. Orders for non-defense capital goods (with or without aircraft) rose moderately strongly.
The final University of Michigan Consumer Sentiment Survey for November registered a moderate gain from October, but was somewhat weaker than expected and a modest decline from the preliminary November report. This was a slightly positive report. After the weakness in the Conference Board report on Tuesday, people were probably relieved that this report wasn’t worse. As usual, note that consumer confidence reports are at best coincident or lagging indicators, not leading indicators, and have no real predictive power for future consumer spending.
The Chicago Purchasing Managers Index (PMI) “Business Barometer” report for November registered a sharp gain and is once again indicating growth after two months of indicating contraction. This was a positive report. New orders and production are up sharply. Unfortunately, the backlog of unfilled orders shrank and employment continues to contract, although both at a slower pace. We need to be careful about getting too excited about one month’s data, but this was a good report.
The Fed Beige Book reported that “Economic activity grew slowly”. This was a mixed, relatively neutral, but not too negative report. The Fed could not discern any dramatic evidence of an economic pickup. Activity was described as “soft”, “sluggish”, “mixed”, “marginal improvement”, and only in the case of the Richmond and San Francisco Fed districts did activity rise to the level of “continued growth, but at a slower pace.” This report suggested that the economy was stuck in first gear, but at least it’s not stalling or going in reverse.
The Conference Board Help Wanted Index registered a moderate decline to a new low. This was a negative report. But it is unclear whether traditional help-wanted advertising may be losing out to other forms of attracting people. For example, retail establishments need only post a help wanted sign in the window and instantly get results. Larger employers can keep resumes on file, rehire former employees, or take employee referrals. And the internet provides a more efficient marketplace for hiring for many positions.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a moderate decline in applications, with a moderate decline in refinancing overwhelming a modest gain in applications to purchase. This was a slightly negative report, but applications are still at a very high level. This report tends to be volatile. The fact that applications to purchase were still up is a good sign.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp gain and its six-month smoothed growth rate rose sharply (but is still fairly negative) and has now risen for four consecutive weeks. This was a positive report. The WLI is now back up to the level of late August. The WLI is still 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.
Revision: The building permits portion of the New Residential Construction report for October has been revised upwards to an increase of 2.7% from a previously reported increase of 1.7%. This is a positive report. Building permits are a precursor to construction and sales.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 7.31% on Wednesday to 30.84, which is in the lower half of the high anxiety zone (30 to 35). It is very rare that VIX spikes up so strongly on a strong rally. There could be something screwy going on. VIX was okay until about 2:30 p.m. when it started to rise from 28.6 into the close. VIX had actually declined to 27 by 10:30 a.m., but by 11:45 a.m. began to rise and broke above 28.5 at 12:20 p.m. before stabilizing a bit. Superficially, this kind of VIX spike means that people are worried that their market gains could easily evaporate and they are buying portfolio protection against declines. Specifically, a rise in VIX means that people are willing to pay a hefty premium to buy ‘put’ options on S&P 100 futures (OEX). On it’s face, this VIX behavior suggests that people suddenly grew very worried that the market would decline. It’s also possible that due to the pre-holiday slowdown, a normal purchase of options was attempted and there were not enough counter-parties available to sell those options at a reasonable price. VIX essentially indicates the balance between supply and demand for the OEX options. Again, I’m suspicious and would not draw any definitive conclusions from the activity of VIX on Wednesday.
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 mostly positive tone for the Wednesday evening session, closing up 0.70 points. There was no real news and everyone was focused on the holiday, so nobody was willing to stick their neck out in either direction.
Fed funds futures suggest a 9% (down from 15%) 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 6% (down from 14%) 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 rose 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. In this case, I think it was anticipation of stronger economic growth that boosted the price. It may also have been short-covering by speculators who had expected weaker economic reports.
[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.
The inspectors uneventfully finished their first ‘field’ day on the job. So far, so good. Give them a few days before they run into their first potential roadblock. They probably want to get their feet wet with low-value “targets” to gain confidence in the process before they go up against the Iraqis on high-value targets like presidential palaces. It’s best to get the Iraqis to relax a bit before pushing them on the difficult issues.
[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.
Level 3 Communications (LVLT) has committed to buying out the assets of Genuity (GENU). Level 3 will continue to run Genuity as a separate business, but without any of Genuity’s bothersome debt. This is a good example of the kind of consolidation that is desperately needed and will eventually bring the telecom sector back to health.
Click here for our more extensive commentary on The Telecom Problem.
…
No activity.
The question is how many people (with money to invest) are still on the sidelines who are willing to believe that the economic recovery is beginning to gather some steam.
The market is only open until 1:00 p.m. on Friday, and many people are away, so we could see a lot of volatility with wild swings.
It’s the last trading day of the month, so there could be some “window dressing” buying (or selling).
My forecast for Friday is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +44 on Wednesday, towards the high-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 11/28/02] The rally is now 35 days old and at its peak. 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). Nasdaq has managed to close above 1350 for 11 days, so that level looks fairly solid. Nasdaq has closed above 1400 for six days, but needs to stay above that level for another day. Now that Nasdaq finally was able to break above 1420/1425, it simply needs to stay there for at least another two 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 getting close to being 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. Nasdaq is only a few points below its 200-day moving average. Nasdaq’s 50-day moving average is within a couple days of crossing up over the 100-day moving average. It’s going to take some determined buying to push past all this resistance. The coming week is critical. If Nasdaq can’t break out by the end of next week, the entire rally could fizzle and evaporate. But, it is looking like Nasdaq will be able to break out for a solid year-end “Santa Claus” rally.
[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 28, 2002 12:12:07 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology