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(Updated since Saturday – changes marked with [ * ])
Nasdaq finally bumped into its 200-day moving average on Friday, but lacked the buying demand to power through it. That was a bad sign, but isn’t fatal unless this weakness persists. But for now, the failure to strongly break through that level was perceived as weakness and led to some moderate selling. Luckily it was a short day.
Even a decent report on chip demand in October was not enough to power Nasdaq ahead, but maybe that was a lot to ask for on a short, holiday trading day.
[ * ] It was disappointing that Nasdaq started the day with a gain (due to an encouraging chip sales report), but deteriorated after that. This suggested selling into the rally, which is not a good sign, but may be okay due to the holiday disruption.
Volume was heavy for a half day (843 million shares). Breadth was only slightly negative, with 1.02 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), JDS Uniphase (JDSU), Sun (SUNW), Ciena (CIEN), Brocade (BRCD), Lucent (LU), Nortel (NT), Juniper (JNPR), and Oracle (ORCL). Clearly institutional traders were not in a buying mood, despite the market decline.
The SIA Global Semiconductor Sales report for October registered a moderate gain. This was a positive report. Chip demand is still a bit shaky, but is doing better than some would suggest.
The Reuters Asset Allocation Table for November registered a moderately sharp gain in the allocation to U.S. stocks (compared to other stocks and cash). This was a positive report. In this survey of 43 fund managers around the globe (completed between November 25 and 27), the allocation to U.S. stocks is now 50.9% compared to 49.5% in October and 46.8% in September. The U.S. allocation is now at the highest level on the table (going back to April 1999). It had risen to 50% in February before declining into September. Fund managers said they were much more impressed at the ability of U.S. companies to restructure and improve their balance sheets than companies in other regions. They were also impressed with the better economic outlook for the U.S. None of this means that the trend will continue and not reverse over the coming month, but at least there is a positive trend currently in place. Unfortunately, it is also possible that 50% might be (or near) an upper limit for the allocation to U.S. stocks.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 0.78% on Friday to 31.08, which is in the lower half of the high anxiety zone (30 to 35). Nothing unusual here, but VIX has definitely moved higher over the past week. That might seem negative, but a move upwards in VIX typically indicates that the stock market will rally again sometime in the future.
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 (afternoon) session, closing down 1.56 points. People are a little worried that the rally is showing some weakness now that we’re bumping into some technical resistance.
Fed funds futures suggest a 9% (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 6% (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 fell moderately 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.
There is anxiety in Israel over the recent attacks, but that probably won’t change the overall picture.
[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.
[ * ] Israel has supposedly activated Mossad “sleeper agents” to track down and eliminate those who were involved with the attacks in Kenya. The activated agents are in Saudi Arabia and Yemen. If this report is true, it could up the stakes in the “global war on terrorism”, and help to target terrorists that are not easily accessible by the U.S. military.
[ * ] The attempted missile attacks in Kenya should not be construed as a significant threat to air travel. As simple as it might seem, it is actually very difficult to shoot down an aircraft with a shoulder-launched missile. Their heat-seeking sensor system is too simplistic to have a high probability of success. Terrorists tried to shoot down a commercial jet in Greece, but failed then as well. Al Qaeda tried to shoot down a lumbering U.S. military cargo plane in Saudi Arabia earlier this year and missed. Military cargo planes are very large and very slow and would seem to be very easy targets, so that shows how problematic these “MANPADs” really are. They work best on helicopters (ask Russia about Chechnya).
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
All quiet on the Iraqi front. So far the Iraqis have been “cooperative”, but the inspectors have not been pushing very hard either. There probably won’t be any dramatic news over the next few days until the Iraqis deliver the declaration that is due by December 8.
[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.
Seven of the nine “holdout” litigating states in the Microsoft antitrust case have decided not to appeal the recent judgment. Massachusetts has decided to appeal and West Virginia has not yet decided. That so many of the litigants punted is a victory for Microsoft.
[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.
Traders may be cautious, but they are also very cautious about betting against the market as they did on Tuesday and then got very burned on Wednesday. It’s very possible that additional short covering could partially fuel a further rally. It’s even possible that some late-stage short-sellers are sitting on losses (since the October bottom) and may opt to do some buying to take the tax losses on those losing shorts. Or maybe they already have.
[ * ] There are certainly people who sincerely believe that the rally is effectively over, but there are probably a lot more people who will take a wait and see approach. If too few people start betting against the market, then we could see yet another short-covering rally. Maybe that’s the key: the only people with conviction are the (majority) wait and see crowd. The lack of conviction by sellers and short-sellers will work to keep the market afloat.
A CNN.com QuickVote poll showed that 51% of 60,520 respondents were planning on spending about the same or more than last year on Christmas shopping. 49% said they planned to spend less than last year. 17% said “more” and 34% said “about the same”.
[ * ] Wal-Mart (WMT) reports that they hit a record for single-day sales on Friday. Sales for the day were 14.4% higher than for the Friday after Thanksgiving in 2001. Top-selling categories included home electronics, small appliances, and toys. The company reported seeing more shoppers and a higher average spent per shopper. Not bad for a Christmas shopping season that was supposed to be lackluster (at best).
[ * ] A survey from ShopperTrak reports that retail sales were 12.3% higher on Friday than last year (which was only 2.7% higher than in 2000). They also showed retail sales being 9% higher on Saturday, or 10.9% higher for Friday and Saturday combined.
[ * ] We do have to be somewhat careful to note that sales don’t necessarily translate into profits. There is so much discounting that profit margins will inevitably take a hit. But, it also depends on where prices were before discounts and how much more efficient businesses are these days.
No activity.
Monday we’re starting a new month, with essentially a clean slate. The market may be a bit overbought, but the question is whether the outlook for business and the economy suggests additional optimism. It is not uncommon for the market to fall off a bit at the beginning of the month, especially if there was substantial “window dressing” at the end of the preceding month.
[ * ] Quite a number of traders may have been gone last week for the holiday week (or at least less active), so today is the first day for people to re-place their stakes in the sand to position themselves for the month ahead.
People will continue to agonize over whether the rally is “real” and whether it will continue. This provides a strong “wall of worry”, and it is tradition that “a bull market climbs a wall of worry.”
We’ll be getting trickles of information about shopping over the Thanksgiving weekend. Some initial “traffic” reports on Friday suggested that shoppers were a little more active than last year. It may not be until Wednesday that we have a clear view of whether shopping was okay, a disaster, or better than expected. Back in 2000, Gateway (GTW) came out and announced that Q4 would be horrible very shortly after the Thanksgiving weekend was over. Rumors will be rampant and market reaction will be quite volatile, especially since their will be plenty of conflicting rumors as each sector or store may see a different picture.
Traders will struggle with the technical resistance facing Nasdaq (200-day moving average and 1500 level), but the real question is whether there is sufficient sidelined money poised to flow into the market to overcome the technical barriers.
Many people may feel that the market is a bit over-bought, but in the absence of any serious selling pressure, the path of least resistance is up. Sure, we could certainly see some more profit-taking, but it would probably last only a day or two or three and then cause a sharp rally after it peters out as we’ve seen in recent weeks.
The downside of entering December is that we’re entering the Q4 “warning” season and nobody expects tech spending to be very strong. Oracle (ORCL) reports in a couple of weeks, so any preannouncement from them could “move the market”.
My forecast for Monday is that Nasdaq will close in the range -60 to +60. Nasdaq came in at -9 on Friday, well 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 11/30/02] The rally is now 36 days old, and only 1 day off 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 12 days, so that level looks fairly solid. Nasdaq has closed above 1400 for seven days, so that level looks fairly solid. Now that Nasdaq finally was able to break above 1420/1425, it simply needs to stay there for at least another day. 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 moderately below its 200-day moving average. It actually bumped into that level on Friday, but the lack of any strong momentum buying was a sign of weakness and led to a moderate pullback. Nasdaq’s 50-day moving average is poised to cross up over the 100-day moving average very soon. It’s going to take some determined buying to push past all this resistance. The coming week is very 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 have an excellent shot at breaking 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 11/30/02] I rate the probability of serious deflation in the U.S. over the coming year at 1 in 1,000 (0.1%). It’s easy to make a hypothetical case for deflation – in any economy – by simplify hypothesizing that a whole bunch of factors all turn south and policymakers do all the wrong things. Fortunately, that’s not likely to happen in the U.S. Sure, there are plenty of sectors where prices have come down either to excess capacity or suppressed demand, but capacity has a way of adjusting and suppressed (or pent-up) demand eventually has a way of reasserting itself. Policymakers are well aware of previous episodes of deflation, so there is little reason to believe that they will make “all the wrong moves” needed to force the economy into a deflationary depression. In truth, we are actually looking at a higher risk of inflation next year since prices of intermediate goods have risen at ever higher rates for each of the five past months. In short, don’t make the mistake of assuming that hypothetical, theoretical, potential disasters are the likely scenario.
[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: December 01, 2002 11:39:27 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology