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Nasdaq didn’t make much progress on Thursday, but the good news is that there was no continuation of the recent sell-off.
Once again, Nasdaq struggled mightily with the 1400 level. We just aren’t quite ready to tackle that milestone. This is not fatal, unless we fail to breakout within the next couple of days. Nasdaq spent over two hours above 1400 and closed only 45 cents below that magic milestone. The good news is that even though Nasdaq failed on several attempts in the afternoon to break through and stay above 1400, there was no sell-off that you might expect to see on such a failure. We are poised to break out, but failure to do so soon could lead to another sell-off.
Nasdaq rose on the open in response to the relatively strong retail sales numbers, but went nowhere (but mostly stayed above 1400) until about 11:30 a.m. and then lost nearly 20 points as it fell to its low for the day at 12:45 p.m. From there, Nasdaq recovered relatively nicely (if only about 10 points) through the afternoon and into the close.
Volume was quite light (1.4 billion shares). Breadth was slightly negative, with 1.03 losers for each gainer. Trading on light volume does not tell us anything about the true market trend.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), CIENA (CIEN), Nortel (NT), JDS Uniphase (JDSU), Flextronics (FLEX), but net buyers of EMC (EMC), Cisco (CSCO), Lucent (LU), and Motorola (MOT). Institutions were doing a lot of both buying and selling, so there was no clear sense of where they think the market is headed.
The Unemployment Insurance Weekly Claims report registered a sharp rise in initial claims (now above 400,000 again), a sharp decline in continuing claims (well under the level of a year ago), a moderate increase in the 4-week moving average of initial claims (but still under 400,000), and a moderately sharp decline in the 4-week moving average of continuing claims. This was a mixed report. Unfortunately, there were sharp increases in the unadjusted, actual data for both initial and continuing claims. Still, both the data and the adjustments are extremely volatile around the holiday season. Also, it never makes sense to read too much into a single data point in a series.
The Retail Sales report for November registered a stronger than expected moderate gain and an even larger gain ex-autos. This was a positive report.
The U.S. International Transactions report for Q3 registered a slight decline in the current account deficit. This was a slightly positive report, but the improvement was very slight. Foreigners still have quite an appetite for U.S. assets.
After the close: AMG Data Services reports that for the week ended Wednesday, December 11, $1.8 billion flowed into equity funds, but two-thirds of those inflows were to non-domestic funds. This was a positive report, but probably not so much for the tech sector. Gold and natural resources funds reported the largest inflows since May 22. Energy funds reported the first inflows in 5 weeks. $1.2 billion flowed out of taxable bond funds. $314 million flowed into municipal bond funds. $10.5 billion flowed into money market funds.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 1.88% on Thursday to 30.81, which is near the bottom of the high anxiety zone (30 to 35). People are still feeling a bit tentative as to whether the fall rally might resume, or whether it will continue to sell off.
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 Thursday evening session, closing down 0.13 points, basically flat. People are rather reluctant to bet on where the market might be headed next.
[UPDATED 12/12/02] The Fed funds futures market suggests that there will be no Fed rate changes through the May FOMC meeting.
Fed funds futures suggest a 12% (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 through the January 28/29 FOMC meeting.
Fed funds futures suggest a 29% (up from 24%) chance of a quarter-point rate cut by the March FOMC meeting. In other words, futures indicate that the Fed will not cut rates through the March 18 FOMC meeting.
Fed funds futures suggest a 10% (unchanged) chance of a quarter-point rate hike by the May FOMC meeting. In other words, futures indicate that the Fed will not cut rates through the May 6 FOMC meeting.
The dollar fell moderately sharply against the yen and fell 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 rose moderately sharply, 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 rose strongly. Gold was finally able to muster enough strength to break through the June peak.
[UPDATED 12/12/02] The latest peak was the December 12, 2002 closing high of $330.90 and an intraday high of $332.60. The previous 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.
There is some amount of increased tension between the U.S. and North Korea, but the media is making it into more of a big deal than it really is. Whether missile proliferation, reprocessing uranium, or restarting their research reactors, these are issues that will be resolved gradually over time. There was also discussion of nuclear sites in Iran that might support nuclear weapons development. There is no imminent crisis or any other cause for alarm.
[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.
I attended a panel discussion at the Brookings Institution in Washington D.C. on the topic of the Iraqi weapons declaration. Unfortunately, we still know very little about what is really in that document, but the panel participants were willing to speculate anyway. The moderator was a former U.S. ambassador to Israel. One member was the former UN chief nuclear weapons inspector in Iraq for the old UNSCOM inspection regime. Another was a former CIA analyst for Iran and Iraq. The other panel member was a foreign policy expert from Brookings. Everyone believes that the document contains mostly previously disclosed information. Panel members were increasingly gloomy about the prospect of war. Previously, some of them had been optimistic on the chances for intrusive inspections, but lately they’ve changed their minds. I listened to them carefully, but my conclusion was that they are mostly just overwhelmed by the whole situation and quite burnt out and more willing to follow the path of least resistance which is to go along with the administration. Unfortunately, we don’t know what path the administration will really take since rhetoric and actions are rarely in sync in politics and the situation with Iraq is very dynamic. The panel discussion was interrupted for a couple of minutes in the middle by a small group of activists who stood at the front of the room and chanted various protests such as “No more war for oil!” before they were politely escorted from the room by the security guard.
[UPDATED 12/12/02] 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. If there is to be an all-out war with Iraq, it would happen in the winter of 2004, not this winter.
[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 could be some extra volatility through next Friday as traders switch from December stock index futures to March futures as the December futures expire next Friday. The shuffling of index futures frequently spills over to the stocks themselves since some traders arbitrage between futures and the underlying stocks while at the same time speculating where the stock indices will be in the future.
No activity.
Traders won’t be able to resist taking a few more shots at the Nasdaq 1400 level which is less than one point above us. It will be easy enough to get there, but staying there is another story. We need to break far enough above 1400 so that we can stay there even if a moderate amount of selling pressure materializes. Even if we manage to close at 1405 or 1410, there will be a high risk of falling back unless some serious, ‘real’ buyers step into the market in a sustained way. On the other hand, there are probably quite a number of relatively new short sellers who thought that the market was headed for a new bear market low but weren’t expecting to have to take sharp losses at this stage, so we could see some significant short-covering over the next week if some serious selling doesn’t materialize.
Today is a Friday, so traders will be inclined to close positions ahead of the weekend when anything can happen.
There are a few economic reports today that might influence the market. The most notable report is the preliminary University of Michigan consumer sentiment report for December, which is likely to be somewhat gloomy since the most recent weekly ABC News/Money magazine consumer comfort index was down moderately sharply.
People may do a little positioning in advance of the quarterly reports next week from companies such as Oracle (ORCL).
My forecast for today is that Nasdaq will close in the range -40 to +60. Nasdaq came in at +3 on Thursday, moderately below the midpoint of my range of -40 to +60. The market continues to be so crazy that it could go either way, but I still believe there is a longer-term upwards bias even if the near-term bias is all over the map.
[UPDATED 12/13/02] The rally is now 45 days old, and 10 days off its peak, and looking quite ragged but hanging in there. It may or may not completely unravel. 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). Now that we have had a reasonable bounce on 12/10, the important thing is that there not be a new low before we see 1-2% confirmation bounce on relatively strong volume 3 to 6 days after the initial bounce (Friday thru Wednesday). That’s the signal that will tell us when the “carnage” is over. It is looking rather 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 11/30/02] 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 12/9/02] 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 -1.5% to 3.5% (midpoint of 1.0%) is possible. 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 -0.7% (low of -1.1 to 0.1). The same survey forecast real GDP growth of 2.6% in 2003 (low of 2.0 to 3.3). There was no hint or suggestion of deflation in these survey results. In fact, The Economist poll for consumer prices forecast a gain of 2.1% in 2003.
[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 13, 2002 01:07:15 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology