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There were plenty of minor excuses for a sell-off on Wednesday, but mostly the selling was due to technical considerations as a lot of people had come to believe that the market was a bit overextended after the recent rally and that profit-taking was in order. Given that sentiment, there was little reason for people to do anything other than sit on the sidelines and wait for the selling to peter out.
Nasdaq has now successfully tested the ‘support’ offered by the August peak and the September 2001 bottom. It was a fairly extensive test, lasting for most of the day until Nasdaq recovered a little after 2:30 p.m.
Despite the steepness of the Nasdaq decline, most of it occurred right at the open, with Nasdaq actually closing 4 points above the opening level. It may not seem like a lot, but it is always technically significant when the market closes above the opening level after a steep opening decline. But, it will only be truly meaningful if we see a strong bounce within a couple of days.
There was a moderately strong recovery attempt late in the day, but it ran out of steam and reversed. It was probably mostly short-covering, so it probably was not very significant.
Volume was moderate heavy (1.86 billion shares). Breadth was moderately negative, with 1.46 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net buyers of Sun (SUNW), Cisco (CSCO), Nortel (NT), EMC (EMC), JDS Uniphase (JDSU), Oracle (ORCL), Lucent (LU), Motorola (MOT), and Applied Materials (AMAT). Clearly institutional investors were buying the dip, suggesting that they believe that it really was just a dip and not the beginning of a much larger decline.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a moderately sharp decline in applications, with a sharp decline in refinancing overwhelming a moderate gain in applications to purchase. This was a slightly negative report, but with some positive elements. Applications are still at a very high level. Interestingly, mortgage rates are actually up, despite the recent Fed rate cut. This report tends to be volatile. The fact that applications to purchase were still up is a good sign. This week’s report may not be completely reliable due to the quirky seasonal adjustments needed for the holiday week.
The revised Productivity and Costs report for Q3 registered an even stronger gain in productivity and a modest decline in unit labor costs. This was a positive report. There was no change (from Q2) in the number of hours worked, but a sharp rise in output. Labor compensation rose (meaning more money in the workers’ paychecks), but not as fast as output. There is a lot of volatility, so we have to be a bit careful about extrapolating this report into the future. Note that higher productivity growth means that companies can be more profitable while at the same time paying more to their workers. The downside of productivity gains is that they put downwards pressure on employment growth unless the overall economy is growing faster than the rate of productivity growth.
The ISM Non-Manufacturing Business Activity Index for November registered a strong gain, well above consensus, to the best level since May. This was a positive report. New Orders and Exports rose quite strongly. Unfortunately, employment continues to contract. Inventories continue to contract. Nine out of the ten industries surveyed reported increased business activity.
The Factory Orders report for October registered a modest gain in shipments, a moderate gain in new orders, a modest decline in the backlog of unfilled orders, and a slight gain in inventories. This was a modestly positive report.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 1.20% on Wednesday to 32.14, which is modestly below the midpoint of the high anxiety zone (30 to 35). People are a bit more concerned that a major sell-off might be looming, but certainly there is no panic.
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 Wednesday evening session, closing up 1.36 points. That’s a small gain, but actually quite impressive after all the negativity associated with recent losses. People believe that the sell-off was overdone, but given the fierceness of recent negativity, people are reluctant to stick their necks out too far, yet.
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 an 8% (up from 6%) 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 modestly against the yen and fell moderately sharply 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 fell moderately, and is 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 rose moderately.
[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.
There had been veiled threats from al Qaeda that there would be renewed attacks after the end of the Ramadan Muslim holy season, which is today and tomorrow, but most likely any attacks would be abroad and focused in the Middle East, Saudi Arabia, Yemen, Africa, and Asia, and not the U.S. “homeland”.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The inspections ramp-up continues. Criticisms will also ramp up, but it’s still too early to judge the inspectors too harshly.
The Iraqi Vice President said that the UN inspectors are “spies”. Politicians speak to many different audiences with differing messages. Undoubtedly, he was speaking to an Arab audience and trying to score points by complaining about the UN. None of this even remotely suggests that Iraq will cease to cooperate with the UN inspectors.
[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.
The hearing in Baltimore for the Sun (SUNW) private antitrust suit continues. Today is the last day.
[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.
A Reuters report says that portfolio managers at American Century Investments say bond investors should lower their horizons. Although bond funds have done well in the bear market, they won’t do as well from here on. They say that “The story is going to change. The party is pretty much over in price.” And “We'll have a mild bear market in bonds.” Rising interest rates when the economic recovery picks up steam will put downwards pressure on bond prices. Some junks bonds will do quite well since their prices are severely depressed and could bounce back strongly as the economic recovery picks up steam. There are still plenty of tricks that bond funds can use to protect principal and boost yield, but the money managers must be quite nimble to avoid forcing their investors to take a bath. The bottom line: American Century’s fixed-income chief’s own portfolio is “overweight stocks” by about 10% with no cash.
Even Bill Gross, manager of the Pimco Total Return (bond) fund says that “There's little doubt ... that the bond market's salad days are over.” More than ever, fixed-income investors must resort to “chasing yield” which is a lousy, high-maintenance way to make money. It’s another sign that people will soon enough be enticed back to stocks.
I have mixed feelings about United Airlines (UAL). On the one hand, it seems quite appealing to simply bail them out and rescue them from the threat of bankruptcy. On the other hand, that would leave them as a semi-crippled, debt-laden zombie of a company. I think I would be happier to see them go through bankruptcy reorganization so that they can shed the heavy debt burden and emerge as a leaner, financially sound business that can once again afford to spend money on things like new planes and technology. The biggest problem with a bankruptcy filing is that it would cancel the current common stock, and that really screws the employees who own 55% of the company. But, as a general rule, I see bankruptcy as a feature of our economic system that lets the system self-correct for past excesses.
I attended a presentation on the topic of failed Arab economies at the New America Foundation here in Washington, DC. Most of the Arab countries lack the institutions to support the kind of large-scale capital formation that is needed for a vibrant economy. Small businesses cannot easily get bank loans. Extended families pool their financial resources and fund small businesses that way. Arab businesses tend to be more oriented towards trading than manufacturing of goods. There is little support for long-term capital investment. Fertility rates are skyrocketing, but job opportunities are not. And the Arab governments are falling behind on offering services. The Islamic extremists at least offer the illusion of a way out. This is a great looming problem.
I attended a discussion of a new book, The Last Jihad, at the Heritage Foundation here in DC. The author, Joel Rosenberg, is an “alumnus” of Heritage. The book was the #1 “mover” on Amazon last night with a sales rank of #2. He talked a little about the book, but mostly about the backdrop and relevance to the current situation. It is eerily reminiscent of 9-11 and the current situation with Iraq, but was mostly written nine months before 9-11. It takes a Tim Clancy-like approach to geopolitical intrigue. The truth is that the book is a first attempt at ‘pitching’ conservative policy messages to the masses in a populist format. I haven’t read the book, and may not unless it appears in cheap paperback format. The bottom line message: Gee, we should do something about Iraq before the situation gets really out of hand.
No activity.
[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.
Nasdaq may re-test the August peak and September 2001 bottom level of support again. It is important that we see a strong bounce above that area within the next few days.
We are due for a strong bounce, sometime over the next few days.
Yet another weekly jobless claims report is due this morning which will give us more clues about the labor market. Unfortunately, the Thanksgiving holiday as well as the usual quirky seasonal adjustments may cause claims to be much higher or lower than they would normally be.
People may begin to buy or sell in anticipation of the employment situation report on Friday.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -19 on Wednesday, 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 12/5/02] The rally is now 39 days old, and 4 days off its peak. I’ll give the market six 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 seems to be holding as it was tested extensively and the market bounced up after the test. 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 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 05, 2002 12:03:02 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology