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Tuesday was a decent, “cathartic” sell-off, a solid day of profit-taking. Oddly, the sell-off did not persist through the day, so it was not a classic “throw in the towel” kind of day. Most (72%) of the decline had occurred by 10:30 a.m. and the closing level was reached shortly before noon. The low was reached at 12:30 p.m., with a modest recovery in the afternoon.
There was a fair amount of disappointment that Nokia (NOK) did not give a more buoyant projection of sales growth in 2003. Their forecast was not bad at all, but simply did not meet expectations. It was more of an excuse for a sell-off than a reason.
Also weighing on the market was a warning from AOL (AOL) that their advertising and commerce revenue would be down in 2003. The reaction to that news was probably overdone since the whole point was that America Online would focus on profitability rather than raw growth.
The cut in stock allocation in the Merrill Lynch asset allocation model (from 50% stock to 45% stock) was certainly a negative factor in the market on Tuesday. But, Merrill’s equity strategist had been the most bearish of the big brokerage firm strategists, so it was no real surprise and shouldn’t be taken too seriously. Two questions remain: how long have Merrill’s preferred clients already had to act on the new model before it became public, and to what extent will investors act on the recommendation and over what period of time. In other words, will the adjustment kick off a lot more selling, or simply an insignificant amount.
Siebel’s (SEBL) CEO said that the Q4 environment is “more robust than the Q3 environment for information technology”. Not that the market seemed to pay much notice to his comments. Or, maybe they did help to blunt the sell-off in the afternoon.
Volume was relatively light (1.63 billion shares). Breadth was quite negative, with 2.1 losers for each gainer. A sharp sell-off on light volume is no big deal, unless it persists and there is no sharp recovery within a week.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), but net buyers of Cisco (CSCO), Intel (INTC), Lucent (LU), EMC (EMC), Nokia (NOK), JDS Uniphase (JDSU), Oracle (ORCL), and Nortel (NT). Clearly the institutional traders were not viewing the sell-off as an indication that the recent rally was over. They were buying the dip, big time.
The Bank of Tokyo-Mitsubishi (BTM)/UBS Warburg Weekly Chain Store Sales Snapshot for the week ended November 30 registered a moderate gain. This was a positive report. It’s not clear whether the report actually covered “Black Friday”, but even that would have to make up for a lost shopping day on Thursday and an almost-lost shopping day on Wednesday. Monthly sales for November (due out on Thursday) will appear quite weak compared to a year ago since there are so many fewer post-Thanksgiving shopping days in November compared to a year ago.
The Challenger Announced Layoff report for November registered a moderate decline (11%) in announced company layoffs. This was a positive report, but the pace of layoffs is still fairly high. There were 13% fewer announced layoffs in November than in November of 2001.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a moderate gain to -17 from -19 (out of a range from -100 to +100). This was a positive report, but merely erases the previous week’s decline (which erased the previous week’s gain!). There was a 2% gain in how people view the overall economy, a 1% decline in how consumers view their own finances, and a 2% gain in how consumers view the buying climate. As usual, consumer confidence reports are not leading indicators. The weekly report tends to be somewhat volatile, so it will take a couple weeks to see if this positive report is just a blip or a resumption of the recent up-trend.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 5.69% on Tuesday to 31.76, which is in the lower half of the high anxiety zone (30 to 35). The rise in VIX was commensurate with the market dip. There were a couple of mini-spikes in the afternoon as the market threatened to sell-off further, but the spikes probably inspired some dip buying.
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 Tuesday evening session, closing down 5.96 points. People are rather gloomy due to disappointing comments from HP (HPQ) and general anxiety that the rally has stalled and may be threatening to evaporate. This could be a contrarian bullish signal as long as the market holds up fairly well.
HP (HPQ) reaffirmed Q4 guidance, but reduced 2003 revenue expectations and said that IT spending remained “tepid” and that the economy was stable, but not accelerating. There was no new negative news here, but people were hoping that HP would be more buoyant. In reality, we should all be quite thankful that HP is being so conservative.
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 slightly 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 modestly, but is still well below the psychological $30 level. Mostly this was due to anxiety over a strike in Venezuela. The strong inventories report after the close will put some downwards pressure on oil prices.
[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 rose moderately sharply, but is still well off the May high.
[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.
Another relatively uneventful day in the ramp-up of inspections. They finally inspected an Iraqi “presidential palace”, uneventfully.
Iraq has indicated that it will submit its weapons disclosure declaration on Saturday, December 7. Of course we are all clueless as to what they will declare. But, rest assured that it will be sufficient to avoid an all-out military conflict with the U.S. It will probably be incomplete in many ways, but will at least be a starting point for future inspections. I suspect that what they will do is simply list all the locations that may have dual use items and make little mention of actual “weapons”. They will certainly list all of the locations that were on Tony Blair’s “dossier” or were ever mentioned by the administration or the media. Basically, anything that they think the U.S. knows about will be on the list. Of course they may move or destroy things and documents, but they will find a way to cover themselves quite well. As a worst case scenario, they could physically destroy or give up their entire WMD program, but keep copies of important design documents and then simply restart programs at a later date.
The administration will continue to turn up the heat and beat the drum about how ready the U.S. is to forcibly disarm Iraq if they do not voluntarily disarm. This intense pressure is an essential ingredient for a peaceful resolution. It’s all a giant negotiation process in which a lot of strong words are used and even threats get made to persuade Iraq to comply, but there is no need to worry that the words will necessarily lead to war. This level of communication of intentions is virtually unprecedented. The clarity of the communications lets all sides know exactly where they stand and what is expected of them.
[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.
There is a three-day hearing underway in Baltimore in Sun’s private antitrust suit against Microsoft. The actual trial may be a year or two away, but Sun is requesting an injunction to force Microsoft to distribute Java with Windows. There would be virtually no near-term negative impact on the company regardless of what the judge decides.
[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.
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I bought some ‘extra’ January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $20 on the market dip. It is my intention to sell a corresponding number of $14 LEAPS (after the market recovers a bit) and pocket the difference. The result will be that I will have the same exposure to the market, but fewer dollars at risk. This strategy is known as “rolling up” (shifting to a higher strike price).
[UPDATED 12/3/02] The main focus of the market is now on the technical issue of whether the rally has peaked and whether it may be about to reverse and head back down. So far, there does not seem to be much enthusiasm for a heavy sell-off. It does look like institutions and “professional investors” (i.e., short/medium-term traders) are doing a fair amount of profit-taking, but it may simply be a changing of the guard as the early birds “retire” and the late-bloomers wade deeper into the market as long as it holds up.
People will be cautious and hang back until it looks like the market is re-stabilizing. Whether that happens today or next week is uncertain.
Nasdaq is now oversold on a very short-term technical basis, so we’re due for a bounce, whether today, tomorrow, or even next week. That doesn’t mean Nasdaq won’t sell off further, but does mean that much of the excess from the top of the recent rally has been wrung out of the market. That’s what “consolidation” is all about.
There will be some anxiety over Iraq, but that is really an irrelevant sideshow compared to the economic and business outlook.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -36 on Tuesday, well above the lower end of my range of -50 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 12/4/02] The rally is now 38 days old, and 3 days off its peak. I’ll give the market seven 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). The September 21, 2001 closing level of 1423.19 looks relatively secure. Nasdaq is having second thoughts about taking on the 200-day moving average and 1500 level, but that’s par for the course. This isn’t fatal, but we’ll only get a couple more shots before momentum will evaporate. 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, again. Nasdaq is now a fair distance below its 200-day moving average. Nasdaq’s 50-day moving average has just barely crossed up over the 100-day moving average, but lack of any buying strength made this a bearish sign rather than a bullish sign. It’s going to take some determined buying to push past all this resistance. This week is very critical. If Nasdaq can’t break out by the middle of next week, the entire rally could fizzle and evaporate. The more consolidation we have in this range, the better the chance of a break out. It is still looking as if 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 11/9/02] 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 12/4/02] Even Stephen Roach, the gloom-and-doom economist from Morgan Stanley, is forecasting real Q4 GDP growth of 1% (as of 12/2/02). He had been adamant that the economy would have a double-dip recession, but now admits that we have escaped two “double-dip alerts” this year. He does still expect that there will be more double-dip scares in the months and quarters ahead. He is a very smart former-Fed economist and even though I don’t share his gloominess, at least he does offer a solid lower bound for the likely performance of the economy.
[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 03, 2002 10:22:45 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology