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Nasdaq staged a very nice bounce on Monday, completely erasing Friday’s steep decline plus adding 89 cents to leave Nasdaq fractionally above the magic 1400 level.
There were random bits of good news to help fuel the bounce, but mostly it was simply a traditional bounce from being oversold of a short-term technical basis. Plus there was a fair amount of short covering by cynics who truly believe that the market should move dramatically lower, but who can’t afford to sit on substantial short-term losses.
There was talk that two brokerage firms recommended that their European clients shift their asset allocations to favor U.S. stocks. These kinds of recommendations almost always stimulate the market.
Merrill Lynch added HP (HPQ) to its “Focus” list. These high-profile recommendations frequently influence the market.
The Nasdaq-100 index re-ranking announcement had little negative impact on the market.
The failure of a New York City transit strike to materialize may have been a positive for the market. Some traders may have added on extra shorts on Friday in anticipation of a messy strike, and obviously that did not happen.
Volume was very light (1.37 billion shares). Breadth was moderately positive, with 1.67 gainers for each loser. It is always at least a little disappointing when a rally occurs on such light volume.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Cisco (CSCO), Nortel (NT), Intel (INTC), Dell (DELL), HP (HPQ), and Applied Materials (AMAT), but net buyers of Lucent (LU), and EMC (EMC). Clearly institutions were doing some of selling into the rally. But they were not doing too much selling since overall volume was very light. This suggests that institutions are somewhat undecided where the market is going in the near term.
Wal-Mart (WMT) said its sales last week were at the low end of its expectations for December. This was a relatively neutral, but slightly negative report.
Federated Department Stores (FD) said it expects sales at stores open at least a year in the combined November and December periods to be at the low end of its forecast range of unchanged to down 2.5 percent. This was a slightly negative report.
J.C. Penney (JCP) said that sales at its department stores open at least a year met expectations in the third week of the December reporting period and were running above expectations for a low-single-digit percentage gain for the month. This was a fairly positive report.
Target said that sales for the month to date and week ended Saturday are “well below plan”. This was a negative report.
ShopperTrak reports that total sales for the seven days ended Saturday were up 12.2 percent from the previous week, but down 4.7 percent from the year-ago period. This was a mixed report. But according to a National Retail Federation survey, which polled 7,500 shoppers on Thursday, the average consumer has completed a little less than 50 percent of their holiday shopping so far.
The NY Fed Empire State Manufacturing Survey showed business conditions rose to 10.6 in December from 9.7 in November, the second straight monthly increase. This was a positive report. New orders jumped to 21.9 from 9.8, which was the highest reading in well over a year, and shipments rose to 18.6 from 9.2 in November. Inventories were little changed from the previous month at 12.3. General business conditions in six months’ time were expected to remain strongly positive at 43.6, although this was down from the previous month and the lowest level this year.
The National Association of Home Builders (NAHB) Housing Market Index (HMI) for December registered a slight rise. This was a positive report. Current sales increased slightly. Traffic of potential buyers remained steady. The only ‘bad’ news was that the six-month outlook declined, but only slightly. Nobody expects housing to strengthen much from current levels, but it is certainly holding up at very high levels.
The Fed Household Debt-Service Burden report for Q3 registered a modest decline in both the total debt-service and the non-mortgage consumer debt service for the third consecutive quarter, but registered a modest gain in mortgage debt service after two consecutive quarters of decline. This was a positive report. Except for a moderately lower reading in Q3 of 2001, the household debt-service burden has fallen to the lowest level since Q4 of 2000. The household debt-service burden is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 6.66% on Monday to 29.98, which is slightly below the top end of the moderately high anxiety zone (25 to 30). Clearly the stock rally relieved a fair amount of anxiety.
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 mixed, but ultimately positive tone for the Monday evening session, closing up 1.24 points. Now that we are getting deeper into “warning” season, people will express relief when we simply see an evening go by without any major warnings.
[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 an 8% (down from 12%) 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 19% (down 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% (up from 7%) 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 rose sharply against the yen and rose slightly 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 very sharply, and is once again modestly above the psychological $30 level. The nominal reason for the rise was the strike in Venezuela as well as the ongoing concern about Iraq. There is also talk that OPEC might finally be able to rein in quota cheating by OPEC members. I suspect that the real reason for the sudden sharp gain was simply short covering and a fair amount of ill-informed speculation (unsophisticated investors being told that gold and “natural resources” are great investments). OPEC has said it would make up for any loss of oil resulting from an attack on Iraq or the strike in Venezuela, and the U.S. has its substantial Strategic Petroleum Reserve, so there is actually little need for concern about supply. In fact, supply will probably continue to be well above demand for some time. Even Iraq is now pumping a substantial amount more of oil than it had been in the past. In any case, at only modestly above $30, the price of oil is not a major concern.
[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 to a new peak closing high of $338.50 and intraday high of $339.27. Some amount of the gain was due to short-covering. The rest was due primarily to old-fashioned speculation. Some of the gain was due to geopolitical anxiety over Iraq, et al. Gold could run up a bit more, but will reverse and settle down once stocks show a little more stability.
[UPDATED 12/14/02] The latest peak was the December 13, 2002 closing high of $332.90 and an intraday high of $335.50. 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.
[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.
Secretary of State Powell repeated the statement that the administration’s demand for “regime change” in Iraq aims at disarmament, not necessarily ousting President Saddam Hussein: “If he cooperates, then the basis of changed-regime policy has shifted because his regime has, in fact, changed its policy to one of cooperation.” But the administration belief is that Iraq will not likely disarm by itself.
Powell reiterated the administration position on their preliminary analysis of the Iraqi weapons declaration: “There are problems with the declaration.” Powell said a final U.S. analysis of the declaration should be completed by the end of this week. The U.S. will discuss its “findings” with the UN Security Council, UNMOVIC, and the IAEA. The U.S. has already forwarded preliminary findings to UNMOVIC and IAEA.
UNMOVIC inspected a biotechnology and genetic engineering site which was a new site in the weapons declaration. So, there is at least some new material in the declaration.
The IAEA inspectors are doing radiological surveys (by “Gamma Survey teams”) as part of their inspections. Residual radiological contamination is very difficult to remove, so there is a fair chance that inspectors will be able to detect whether radioactive materials had ever been in a facility or area. It is also possible to do wide-area radiological surveys for gamma radiation from a motor vehicle or even a helicopter. Inspectors do not have to be in physical contact with or take physical samples to test and survey for contamination that emits gamma radiation. Inspectors are also sampling water and even silt to test for radiological contamination.
As of Sunday, there were 105 inspectors, with 86 from UNMOVIC and 19 from IAEA.
[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.
Electric power has finally been fully restored in North and South Carolina. It is not clear what the net cost of the recent power outages were, but they had to be substantial. Now people can get back to the primary task at hand: Christmas shopping.
I made my weekly dollar-cost-averaging purchase of January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $20. Due to the market decline last week, I was able to purchase more contracts than last week for roughly the same amount of money.
Traders will be uncomfortable letting Nasdaq sit right at the 1400 level, so they will either run it up further, or run it back down.
Economic reports are due out today on consumer inflation, housing starts, and industrial production that may move the market.
Traders will continue to position themselves for quarterly reports due this week from Oracle (ORCL), 3Com (COMS), Red Hat (RHAT), Palm (PALM), Micron (MU), Jabil (JBL), Solectron (SLR), Research In Motion (RIMM), Manugistics (MANU), and TIBCO Software (TIBX). The market could rally a bit in advance of the reports in anticipation that results won’t be as bad as had been expected.
Mostly people will be focused on the issue of whether the October recovery will resume or continue to unravel. In part, this rests on whether people feel strongly that the economy will be at least moderately stronger in six to nine months.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +38 on Monday, towards the upper 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 12/17/02] The October recovery is 47 days old, but the correction off the peak is now 12 days old. Nasdaq is looking quite ragged but still retains all of the October gains even though most of the November gains are gone. It may or may not completely unravel. I’ll give the market six more days (I add a day if Nasdaq rises and subtract a day if it declines) 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’ve seen a decent bounce on Monday 12/16, we need to see two days go by without setting a new low and then we need to see a solid 1-2% bounce somewhere between Thursday and next Tuesday on higher volume than the preceding day without setting a new low of any of those days. That would be confirmation that we are embarking on a new rally, the next leg up of the October recovery.
[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 12/16/02] The economy is looking even more mixed than before. Although there are plenty of signs of weakness, there are increasingly tantalizing tidbits of improvement. 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 17, 2002 12:03:49 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology