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(Will be updated for Monday)
Finally we got a little bounce on Friday. Nasdaq closed up 31 points from the low of the day and only 8 points off the high. That’s a respectable bounce. But I wouldn’t get too excited or relieved since there could have been a fair amount of short-covering in advance of the weekend.
In order for this bounce to truly mark the end of the correction, we need to see another strong day (at least 2% gain) within four to seven days, and certainly no decline below the low on Friday.
The weak employment report and resignation of Treasury Secretary O’Neill gave the market a decided negative tone at the open. All of this was such a silly knee-jerk reaction.
It was quite impressive that Nasdaq started to bounce barely five minutes after the open. Maybe it was that second resignation (Larry Lindsey) that suggested that the administration was getting serious about cleaning house. Unfortunately, by 10:40 a.m. Nasdaq bumped into resistance at the 1420 level and the recovery stalled until another valiant rally attempt between 1:30 p.m. and 2:45 p.m.
Nasdaq really struggled against the 1420/1425/1430 levels. This suggests that there was not much ‘real’ buying going on and that most of the day’s action was traders playing off technicals. Nasdaq managed to stay above 1425 for an hour in the afternoon, but only momentarily poked above 1430 on two occasions. The failure to break through 1430 on the second attempt probably triggered the minor pullback late in the afternoon. The September 21, 2001 closing level of 1423.19 was the real and final stumbling block that kept Nasdaq restrained in the final hour.
Volume was light (1.52 billion shares). Breadth was modestly positive, with 1.16 gainers for each loser. People seemed reluctant to commit to the market, either for buying or selling, in advance of the weekend, especially with the Iraqi weapons disclosure declaration due.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), but net buyers of Rational Software (RATL), Intel (INTC), Cisco (CSCO), JDS Uniphase (JDSU), Applied Materials (AMAT), Lucent (LU), EMC (EMC), and Oracle (ORCL). It is always comforting when the institutions are buying into a rally rather than selling into it. They recognized the dip as a great buying opportunity.
The Employment Situation report for November registered a modest decline in nonfarm payroll employment, or as the Department of labor put it, “little changed”. This was a slightly negative report. Overall, it was a very mixed picture and nowhere near as bad as the initial market reaction. The retail sector added jobs even as manufacturing jobs were lost. The population rose by 176,000, but the work force shrank by 390,000. Household employment shrank by 689,000 and household unemployment rose by 299,000. The unemployment rate rose from 5.7 to 6.0. The number of people not in the work force rose by 568,000. An additional 272,000 of those not in the labor force currently want a job. The unadjusted household data was not significantly different than the adjusted data. Nonfarm payroll employment shrank by 40,000, but unadjusted, actual nonfarm payroll employment rose by 100,000. Goods-producing payroll employment shrank by 51,000 (190,000 unadjusted). Manufacturing payroll employment shrank by 45,000 (73,000 unadjusted). Service-producing payroll employment rose by 11,000 (290,000 unadjusted). Of service-producing jobs, retail trade payroll employment shrank by 39,000 (but rose by 298,000 unadjusted – in anticipation of the holiday shopping season). Finance, insurance, and real estate payroll employment rose by 7,000 (12,000 unadjusted). Other services payroll employment rose by 50,000 (but shrank 162,000 unadjusted). Government payroll employment rose 8,000 (169,000 unadjusted). Federal government payroll employment rose 3,000 (7,000 unadjusted). State government payroll employment rose 1,000 (117,000 unadjusted). State education payroll employment was unchanged, but rose 27,000 unadjusted. State non-education payroll employment rose 1,000, but fell 10,000 unadjusted. Local government payroll employment rose 4,000 (145,000 unadjusted). Local education payroll employment shrank by 3,000, but rose 130,000 unadjusted. Local non-education payroll employment rose by 7,000 (14,000 unadjusted). The length of the average workweek was unchanged. The average hourly earnings rose slightly (0.3%) and the average weekly paycheck rose at the same rate. Overall, the report was fairly benign, despite the fact that many people had expected something better. The labor market is stagnant, but not deteriorating dramatically. Please note that employment is a lagging indicator and that unemployment frequently rises in a recovery until GDP growth exceeds the rate of productivity growth.
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 five consecutive weeks. This was a positive report. The WLI is now back up to the level of mid-July. 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. The good news is that there is a definite upwards trend. Even if the WLI makes no significant headway over the next few weeks, its smoothed growth rate will begin to go positive before the end of the year. Any dramatic, continued weakness in the stock market could change the picture though.
The Consumer Credit report for October registered only a very modest gain in consumer credit. This was a somewhat positive report. Credit card debt rose modestly, but non-revolving debt actually declined slightly. Consumers are still borrowing in moderation (a good sign), but not dramatically further overloading with debt either (another good sign).
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 4.67% on Friday to 32.68, which is slightly above the midpoint of the high anxiety zone (30 to 35). People were clearly relieved that the market was able to bounce, especially in light of the weak jobs report and the ‘resignations’ from the White House economic team. VIX did spike up to 35.58 (up in the very high anxiety zone) shortly after the open, but trailed off nicely for the rest of the day as the sell-off fizzled.
VIX has ‘rallied’ strongly over the past two weeks, and is now overextended and due for a pullback. That means that there is a likelihood of a continuation of the rally, but no certainty as to timing or duration.
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 slightly positive tone for the Friday evening session, closing up 0.7 points. This was a typical Friday evening session with few people interested in changing their positions after the close of the day session. The calm is a relief.
Fed funds futures suggest a 12% (up from 9%) 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 12% (up from 8%) chance of a quarter-point rate cut by the January FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the January 28/29 FOMC meeting.
The dollar fell moderately sharply against the yen and 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. It is now close to the June high.
[UPDATED 12/6/02] The last peak was the June 2 closing high of $327 and the June 3 intraday high of $331.
[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.
Everybody is awaiting the Iraqi weapons disclosure declaration, expected today or tomorrow. It is totally unclear how long it will take before we get any clues as to what is in it and what is not in it. One report said that an Iraqi official said it would be 4,000 pages plus 7,000 to 8,000 pages of supporting documents. In the past, Iraqi declarations have been in English, but the supporting documents were in Arabic. It is also very possible that the declaration may include some surprises or revelations, solely for the purpose of throwing the administration off balance.
The inspectors had taken Thursday and Friday off due to the celebration of the end of the Ramadan holy month, but they should be back at work today.
[UPDATED 10/11/02] My assessment remains that there is virtually no chance of an all-out military conflict with Iraq this year and only a 20% chance next year.
[UPDATED 9/16/02] The bottom line is that investor concern over the sluggish economic recovery and weakness in corporate revenue and earnings growth still weigh more heavily on the market than all the other non-economic factors. Traders merely use Iraq, et al as excuses for any market weakness.
Click here for our more extensive commentary on The Iraq Problem.
Click here for our more extensive commentary on Technology.
No activity.
[UPDATED 8/5/02] Check out our book list.
[UPDATED 7/23/02] Absolutely nothing more is needed at this point other than to simply let the current market-driven corrective processes play themselves out.
Click here for our more extensive commentary on financial reform.
Click here for our more extensive commentary on The Telecom Problem.
The ‘resignations’ of Treasury Secretary O’Neill and top White House economic advisor Lindsey were both a surprise and not a surprise. There had been suggestions for both of them to leave for many months. Both are very solid and competent contributors to the economic team, but neither did much at all to command the respect of either Congress or Wall Street. Neither seemed much in tune with either Washington politics or Wall Street. We’re in a time where raw competence is insufficient. Leadership is required. Or at least the perception of leadership and perception is 99% of everything in both Washington and Wall Street. There are plenty of staff people to do all the heavy lifting work that O’Neill and Lindsey were responsible for, so it is merely a question of who would be sufficiently respected by both Congress and Wall Street. Not to mention who would impress voters in the 2004 election. There may be anxiety until the replacements are in place, but there is already enough momentum in place to keep things moving until then. This dramatic “housecleaning” step seems like a really good move. The decision to ax these two guys was probably a political strategy decision that the administration was vulnerable on economic issues. In any case, people are so anxious about the current state of everything, that almost any change is viewed as a positive. A dramatic sweeping away of the old to make way for the new is always a good strategy when gloom sets in. The good news is that the ‘resignations’ indicate that the administration is very serious about being much more proactive about the economy.
The administration still needs a new guy to head the SEC. I sure wish that they would put former SEC chairman Arthur Leavitt back in at least as an interim measure. He has the stature, respect, knowledge, experience, and motivation to do a fantastic job like nobody else.
No activity.
[UPDATED 12/6/02] The main focus of the market is now on the technical issue of whether the rally is merely correcting before continuing or is fully reversing and will continue to fall. 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 gradually wade deeper into the market.
It will be important that we not see any dramatic selling on Monday. We don’t need to see a big bounce, but simply not another low for the rally correction.
The market will react to hints from another weekend of Christmas shopping. This is a short season with only two more weekends besides this one before Christmas.
The market may be a bit cautious in advance of the Fed FOMC meeting on Tuesday. The Fed is not expected to change interest rates, but will certainly make a statement concerning the outlook and risks for the economy. There won’t be anywhere near as much anxiety ahead of the meeting as there usually is since nobody expects any rate change. But after recent sluggish economic reports, people will be waiting to hear if the Fed suggests a bias towards weakness in the period ahead. The Fed was rather upbeat after the last meeting, and the economic situation is not significantly worse than it was at that time.
The market may react to the filing of the Iraqi weapons disclosure declaration, but it could go either way. There could be relief that a milestone has been met, or anxiety that we don’t know if real progress has been made.
My forecast for Monday is that Nasdaq will close in the range -50 to +50. Nasdaq came in at +12 on Friday, modestly above the midpoint 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 12/7/02] The rally is now 41 days old, and 6 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). Nasdaq remains stuck below the September 21, 2001 closing level of 1423.19, which is not a good sign, but not completely fatal. It’s going to take some determined buying to push past all this resistance. If Nasdaq can’t break out by the end of next week, the entire rally could fizzle and evaporate. It is looking a little gloomy, but Nasdaq still has a good 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 06, 2002 10:50:18 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology