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I can’t blame traders for inciting the market decline on Wednesday, since the Nasdaq-100 Pre-Market Indicator was actually up 2 points at the open and Nasdaq itself opened up 2 points and held steady for about 10 minutes before the sell-off took hold. The initial phase of the decline petered out around 10:30 a.m., after Nasdaq had lost hardly more than 10 points. Nasdaq then recovered slightly (about 5 points), but that buying also petered out. Nasdaq stayed reasonably flat until about 11:30 a.m. when its main dive started, falling 20 points by 12:15 p.m. It stayed flat for half an hour and then took another 10-point dive around 12:45 p.m. It stayed fairly flat again until shortly before 3:00 p.m., and then gradually gave up another 16 points into the close.
It is possible that there was in fact some ‘real’ selling (especially since volume was heavy). We have been seeing decent net inflows to stock mutual funds, but that does not preclude the occasional day when funds happen to be seeing outflows. The net inflows simply aren’t large enough and consistent enough to guarantee that we won’t see days like Wednesday.
It’s possible that people may have put tighter ‘stops’ on their positions and that the modest early decline may have triggered enough stops to set off a cascading snowball effect, attracting even more downside momentum traders.
It’s also possible that since the market was unable to build on the modest opening gain, traders simply reversed and shorted the market. That happens all the time and usually traders reach a point of selling exhaustion fairly quickly, but maybe this time there was just enough non-trader selling to keep the ball rolling.
Although people have been chattering a lot about “valuations” lately, the bears always do that, so it’s nothing new. From everything I can find, there was no compelling new argument on Wednesday to suggest that the decline was due to fundamentals. So, I would surmise that five factors may have come together on Wednesday: 1) buying petered out, so traders went short, 2) tight ‘stop loss’ orders were triggered, 3) there may have been some mutual fund selling, 4) the bears sensed some weakness, so it was one of their few chances to ‘safely’ go short, and 5) all of the above attracted some short-term traders who simply follow the momentum until it peters out.
The only ‘big’ negative news on Wednesday was the talk of OPEC cutting back on oil production, but oil prices were still reasonably okay (well below $30) even with the news. And, the OPEC news was out two hours before the stock market open. So, I wouldn’t blame the market drop on oil prices.
The dollar did weaken moderately, but not by enough to change the big picture by much at all. And with the economy improving, the long-range outlook for the dollar gets better. And demand for new treasuries auctioned on Wednesday was very strong, so there was no ‘real’ lack of demand for dollar-denominated assets. So, I wouldn’t blame the market decline on anything to do with the dollar.
Treasuries rose (which frequently happens when stocks fall), but that pushes interest rates down, making stocks even more attractive.
The bottom line is that although many people are quite optimistic, they have also been a bit skittish and unsure of their confidence all month, partially due to the lofty market levels, partly due to the ‘fact’ that September historically is a down month, and partly due to a general lack of certainty for the pace of the economic recovery over the coming year. All of that means that days like Wednesday will occur now and then. That’s not to say with certainty that we are not in the midst of a ‘real’ correction, but simply that the decline was not a certain signal of a larger correction.
The simple way to read the decline is that Nasdaq is not quite ready to move out of the 1800-1900 range. Part of that is a need to see a little more economic improvement and a little more revenue and earnings growth, and part is for a bit more money to cumulatively flow into stock mutual funds (the “rising tide”).
Volume was heavy (2.18 billion shares). Breadth was strongly negative, with 2.31 losers for each gainer. This was clearly a strong sell-off, making it a very clear yellow flag. That’s not fatal, but a noteworthy caution.
According to Thomson Financial I-Watch, institutional investors were net buyers of Intel (INTC), Sun (SUNW), EMC (EMC), Microsoft (MSFT), JDS Uniphase (JDSU), Oracle (ORCL), Cisco (CSCO), Applied Materials (AMAT), and Micron (MU). Clearly institutions were buying the dip, strongly suggesting that the market is not about to dramatically fall off a cliff any time soon.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a moderate decline in applications, with only a slight decline in refinancing, but a moderately sharp decline in applications to purchase. This was a negative report, but the impact of Hurricane Isabel is unclear. Nonetheless, demand for buying homes is still quite strong.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 15.36% on Wednesday to 22.98, which is in the upper half of the moderate anxiety (low complacency) zone (20 to 25). Clearly people were a bit shocked by the sharp decline on heavy volume. VIX jumped up to 20.44 on the open, but hovered around 20.50 until around 11:30 when it begin to trend up as the market began to exhibit greater weakness. There was a clear spike upwards in the final minutes of trading, probably due to people desperately buying portfolio protection in the absence of any sense of whether the market sell-off was near an end. There is a good chance that the spike at the end of the day was in fact a minor ‘capitulation’ and signals the end of this latest bout of selling. The good news is that VIX is now high enough that the pessimists will no longer feel that VIX itself signals a dramatic sell-off ahead.
The Nasdaq-100 After Hours Indicator had a mostly positive tone for the Wednesday evening session, closing up 0.53 points. People believe that the sell-off was way overdone, but nobody wants to stick their neck out too far, yet.
[9/17/03] The fed funds futures market suggests that the Fed will leave rates unchanged for the rest of the year, but possibly raise rates by a quarter-point in May. Fed funds futures are at best accurate no more than six weeks out, so those longer-term moves are purely speculative, at best.
The dollar fell moderately sharply against the yen and fell moderately against the euro. The dollar is quite sound and no true investor should lose any sleep worrying about whether the dollar is ‘weak’ or ‘strong’ on any given day, week, month, quarter, or year.
The price of oil rose very sharply, but is still well below the $30 “comfort” level. There were indications that OPEC will cut production, presumably to make up for the increased Iraqi production. A good portion of the rise was probably simply short-covering. In any case, the price of oil continues to be relatively well-behaved and no true investor should lose any sleep worrying about it.
The price of gold rose moderately sharply. In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[7/29/03] The relative calm continues. Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[7/29/03] 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. Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents or rumors of incidents.
For the week ending Wednesday, September 24, the Pentagon reports that 1,858 fewer reservists are on active duty, for a total of 170,465. This was moderate decline. All four of the Services showed a decrease in the number of reservists on active duty. The headcount has declined by 54,063 or 24.1% from the peak of 224,528 on May 1st. Reserves on active duty have been below 200,000 for 10 consecutive weeks.
[7/29/03] As messy as the mopping-up phase of the war continues to be, great progress is indeed being made and there is little need for true investors to fret over the negative news that so captivates the media. Over time, the economic impact of the war will be a large net positive, even if there is some short-term negative impact.
I attended a panel discussion at the New America Foundation here in Washington, D.C. on the topic of alternatives to how the poverty level is measured. One proposal was for a self-sufficiency standard that would take into account more of the factors that affect how much people need to live, including better adjustments for specific location of residence. Another proposal related to an asset-building program which would be based on whether a household is “asset poor”. The whole area is filled with issues, and they didn’t even get into minimum wage and the so-called “living wage”.
I attended a portion of a panel discussion at the American Enterprise Institute on the topic of “matched loans” at big banks. The basic concept is that a big bank does a combination of investment banking and a large commercial loan or revolving credit line. The issue is whether they are discounting one to get the other business and whether that puts smaller banks at a disadvantage. The claim is that the investment banking and loans are syndicated with so many participants (who don’t necessarily participate in both sides of the deal) that it’s a non-issue. I’m not convinced that it’s a non-issue in all cases, but I can see how in many cases it’s not as completely bogus as it superficially seems.
[6/25/03] I have suspended my dollar-cost averaging investment plan since my exposure to the market is now about where I want it to be.
Nasdaq is now ‘oversold’ on a short-term technical basis, so we are due for a bounce, but we will have to wait and see whether the decline on Wednesday was a one-day affair or part of a larger correction.
The weekly jobless claims report due out today will give us a few more clues about the nature of the recovery. Initial claims could go either way, but I do expect to see a decline, at least once the dysfunctional seasonal adjustment is removed.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -58 on Wednesday, well below the lower end of my range of -40 to +50.
The confirmed bull market for Nasdaq that began on October 9, 2002 (and was confirmed on June 16, 2003) has run for 241 days. The market now has a longer-term upwards bias despite near-term volatility. The path of the market through the early fall is completely uncertain, but Nasdaq will likely be higher at the end of October. The important thing is that we continue to see inflows into equity mutual funds while the economy, revenues, and earnings continue to incrementally improve.
The confirmed up-leg for Nasdaq that began with the intraday low of 1,253.22 on March 12 (and was confirmed Monday, March 17) has run for 133 days. Nasdaq is 4 days off its closing peak (1,909.55 on September 18 – previous peaks were 1,888.62 on September 8, 1,868.98 on September 4, 1,852.90 on September 3, 1,841.48 on September 2, 1,810.58 on August 29, 1,800.18 on August 28, 1,782.13 on August 27, 1,777.55 on August 21, 1,761.11 on August 19, and 1,754.82 on July 14) for the up-leg and for the overall post-October bull market. That closing peak is also the current 52-week closing high.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, August 8 with an intra-day low of 1,640.88 is now 32 days old and 4 days off its closing peak. This is a minor leg nested within the larger leg that started on March 12 which is itself nested in the larger advance that started on October 9.
The new confirmed minor up-leg for Nasdaq that began with the intraday low of 1,819.42 on Thursday, September 11th (after the correction off the September 8 peak of 1,888.62) is now 10 days old and 4 days off its closing peak. This new up-leg is really simply an even more minor leg nested within the August 8th leg which is in turn nested within the March 12th leg which is in turn nested within the October 9th advance. This leg is now clearly ‘broken’, but it won’t be completely dead as long as it stays above its starting point.
Based on my prior estimate of 50 to 120 points of “trading froth” in Nasdaq as of the close on Friday, I would now estimate that we still have up to another 60 points of froth that traders could burn through before we would have to conclude that a major correction was underway. I continue to believe a decline such as we saw on Wednesday is well within the range of the “trading froth” in the market, so that we’re probably just seeing precisely the kind of ‘action’ that should be expected when a market is moving higher so strongly as Nasdaq has been.
[8/19/03] The latest economic data continues to support the thesis that the U.S. economy is solidly into a gradual, zigzag, underappreciated, stealth recovery. What’s different lately is that there is now a slowly rising chorus of people basically saying “You know, this economy does seem to be improving and faster than we thought.” The recovery hasn’t been and won’t be as sharp as for a ‘traditional’ recovery, but will end up being far more durable and sustainable. The two key factors driving (or slowing for now) the pace of the recovery are the ongoing process of shutting down or restructuring ‘problem’ businesses and the pace of the formation of new businesses.
[9/1/03] Our Tech Stock ‘Safe’ Signal is still stuck at 0.00 (no safety) since none of the big tech companies are even hinting that they are seeing any significant improvement in demand. There does seem to be some sense of stabilization and a modest hint of improvement, but no clear and decisive indication of a dependable ramp up in revenues and earnings.
[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: September 24, 2003 10:34:14 PM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology