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One-third of Nasdaq’s decline on Wednesday came at the open, another third within the first 35 minutes of trading, and the final third by 10:50 a.m. The bottom occurred shortly after 11:00 a.m. Nasdaq recovered a little and then traded in a narrow range for the entire rest of the day. Nasdaq managed to close a little less than 6 points above the morning low. Other than that initial plunge in the first 80 minutes of trading, there was no sign of any significant selling pressure. It seemed like a bunch of momentum traders dumping stocks in a mini-panic, and then institutions doing a fair amount of bottom fishing.
The lousy quarterly report from Micron (MU) was a prime culprit. Anxiety over Iraq was a secondary cause, but Micron had enough negative momentum that people just stepped aside and let the market fall until the selling stopped.
Volume was light (1.49 billion shares). Breadth was fairly strongly negative, with 2.39 losers for each gainer. The decline was disappointing, but has no real significance due to the light volume.
According to Thomson Financial I-Watch, institutional investors were net buyers of Cisco (CSCO), Micron (MU), Sun (SUNW), Oracle (ORCL), Intel (INTC), Qwest (Q), EMC (EMC), JDS Uniphase (JDSU), and Nokia (NOK). Clearly institutions were buying heavily into the dip, suggesting strongly that they don’t believe that the October recovery is doomed, at least yet.
The U.S. International Trade report for October (not November) registered a moderate reduction in the trade deficit, the second decline in two months. This was a positive report, but may be mostly due to the impact of the West Coast port strike.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a moderately sharp rise in applications, with a moderately sharp rise in refinancing and a moderate rise in applications to purchase. This was a positive report. Although off the recent highs, applications are still at a high level.
After the close: The SEMI Chip Equipment report for November registered a modest decline (0.86%) in sales (billings), a modest gain (0.45%) in orders (bookings), and a slight gain in the book-to-bill ratio to 0.79 which is well below 1.0, indicating that future revenues will be substantially lower than in November. This was a mixed, but slightly positive report since it does at least hint at an improvement in the trend for new orders.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 5.27% on Wednesday to 31.75, which is in the lower half of the high anxiety zone (30 to 35). Clearly people were disappointed by the market decline, but there was no hint of panic. There were a few minor spikes in VIX, but nothing meriting additional attention.
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 5.03 points. Solid reports from Oracle (ORCL) and Palm (PALM) and lack of any major new disasters did the trick. People realize that the sell-off during the day was more than a bit overdone.
[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 38% (up from 25%) 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 5% (down 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 fell modestly against the yen and rose moderately 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, and is modestly above the psychological $30 level.
The administration says that although it continues to monitor the situation in Venezuela very closely, it does not feel that there has been enough of a supply disruption to warrant tapping of the U.S. Strategic Petroleum Reserve.
[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 sharply to new peak closing and intraday highs of $344.65. You see the combination of momentum traders piling on coupled with short-covering by people who know that the gold rally is now way overbought. Sometimes it is best to simply get out of the way and let the speculators run until they drop.
[UPDATED 12/14/02] The latest peak was the December 17, 2002 closing price of $336.80 and intraday price of $342.70. 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.
The administration has clearly signaled that it will inform the UN Security Council (maybe today) that the Iraqi weapons declaration is insufficient, but the administration has indicated that it won’t use that as an immediate cause to go to war with Iraq. The likely scenario is that the U.S. will carefully inform the inspectors of the problems with the declaration and then informally get the inspectors to agree to an accelerated and more intrusive inspection regime, hopefully armed with some specific intelligence from the U.S. The inspectors will probably also inform the Security Council today of problems that they see with the incompleteness of the declaration. In any case, inspections will continue and a more formal (but still preliminary) inspections report will be presented to the Security Council by the inspectors on January 27. It could then take a week or two to fully analyze the inspections report. There would be very little benefit to the U.S. of going to war with Iraq before then. The administration apparently understands the merit of letting the UN inspections process play out. A lot of people seem to be acting as if there was a real or even likely possibility of war before then, but there is very, very little chance of war before then. Most likely, Iraq will make a number of concessions before the January 27 deadline.
The administration continues to beat the “that was Saddam’s last chance” drum even though it is clear that there will be plenty of room for Iraq to reconsider (at least through January 27) and be more forthcoming, especially as the inspectors become more intrusive.
There was a report that the administration plans to begin an additional military buildup in the Persian Gulf region in January. It would certainly take more than two or three weeks even if the Pentagon does accelerate the process. The report said that the buildup would be “highly visible” to put added pressure on Iraq to disarm. This all makes perfect sense, but still does not indicate that an actual war is imminent. Another report suggested the Pentagon was ready to ship 50,000 troops to the region after the holidays who would begin arriving in the region by the middle of January. The Pentagon is leaking all this information to turn up the heat on Iraq. Iraq only cooperates to the extent that they believe they have no choice. It should be getting exceedingly clear to them (and everybody else in the world) that unless they voluntarily disarm, the U.S. will do the job for them. I continue to believe that Saddam Hussein (and his sons) sincerely wish to remain in power, so ultimately they will cave on whatever demands we place on them.
For the week ending December 18, the Pentagon reports that 4,704 additional reservists are on active duty, for a total of 55,530. There is still no sign of any large-scale call-up that would be required well in advance of an all-out military conflict with Iraq. For comparison, there were 61,373 reservists on active duty as of January 2, 2002, 79,124 as of August 7, 59,097 as of October 16, and 51,358 as of November 13.
[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.
Qwest (Q) moved a step closer to exchanging a large pile of its shorter-term debt for a somewhat smaller pile of longer-term but higher interest debt. Some of the bondholders sued, hoping to get a better deal, but the judge basically said “too bad”. This will dramatically reduce the chances of Qwest having to file for bankruptcy. They are not out of the woods yet, but are making progress.
Click here for our more extensive commentary on The Telecom Problem.
Sunbeam is about to emerge from Chapter 11 bankruptcy. Global Crossing received court approval on Tuesday for its bankruptcy reorganization plan and is expected to emerge in March or April of 2003. Enron and WorldCom reorganizations are in the works. These types of reorganizations are perfect examples of how the U.S. economic system is far superior to Japan, Europe, or anywhere else.
It is uncertain how much tax-loss selling may be hitting the market.
No activity.
People will respond to the quarterly reports from Oracle (ORCL), Palm (PALM), et al. The analysts will weigh in on the quality of the reports.
News about how the U.S. and then UN are responding to the Iraq weapons declaration may also influence the market.
The weekly unemployment claims report will give us a few more clues about the labor market, but the holiday season schedule and quirky seasonal adjustments might dramatically skew the data.
Traders may cut back in advance of the coming holidays. With the holidays in the middle of the week, some market participants may bug out early and punt for the rest of the year.
My forecast for today is that Nasdaq will close in the range -40 to +60. Nasdaq came in at -31 on Wednesday, moderately above the lower end 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 12/19/02] The October recovery is 49 days old, but the correction off the peak is now 14 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 four 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). The decline on Wednesday completely wiped out the Monday bounce, so we are once again waiting for another initial bounce to see if we can finish “the December correction.”
[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 12/18/02] There seems to be some amount of consensus that the economy will continue to grow at a sluggish pace in the first half of 2003, but then accelerate in the second half of the year. Of course, that’s what people said about 2001 and 2002. Part of this new consensus is an expectation of war with Iraq in Q1, possibly spilling into Q2, but then the economy would pick up after Iraq is out of the way. I don’t concur with the consensus on Iraq, but I am fully prepared to assume growth in Q1 and Q2 may be no more than modest. On top of this economic expectation, we layer an expectation that the stock market is typically expected to react six months in advance of economic changes.
[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 12/18/02] 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 December 7), “The behavior of the economy this year indicates that the decline in activity that began last year may have come to an end. But recent data show 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 18, 2002 11:04:34 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology