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Nasdaq attempted a recovery bounce on Thursday, but it was too halfhearted to inspire any confidence, which only encouraged traders to put additional downwards pressure on the market.
The good news is that we may have finally had a decent washout of the market, such that all the weak hands may be out and everybody that’s left intends to hang in there. The selling in the final hour of trading was a classic “throw in the towel” slide with no attempt to bounce. At this stage, the ‘risks’ for short-sellers (and urge to take profits) begin to loom dramatically, so there is a greater chance of a recovery than a major decline.
The economic and business news was mixed, so there was no incentive for the market to go up or down, which means traders maintained their negative bias.
The decline had absolutely nothing to do with “valuation concerns” or other chatter such as traces of enriched uranium in Iran, and was strictly technical in nature. There were simply too few people who were convinced that the selling had exhausted itself and the weakness still proved to be attractive to the short-sellers.
Volume was heavy (2.02 billion shares). Breadth was strongly negative, with 2.79 losers for each gainer. This was a solid sell-off. Sure, this is another yellow flag, but it’s also possible that the selling may be near exhausting itself.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Cisco (CSCO), Microsoft (MSFT), and Applied Materials (AMAT), but net buyers of EMC (EMC), Oracle (ORCL), JDS Uniphase (JDSU), Micron (MU), and Flextronics (FLEX). There was a fair amount of institutional selling into the occasional rallies, but also a fair amount of rotation into other stocks, strongly suggesting that the market is not about to dramatically fall off a cliff any time soon.
The Unemployment Insurance Weekly Claims report registered a moderate decline in initial claims – back under 400,000 – and a modest decline in continuing claims. This was a positive report, but it’s possible that claims were limited by Hurricane Isabel, so that we could see an added rise this coming week. Unadjusted initial claims declined moderately to 296,925, moderately below the year-ago level of 317,264 – and well under 400,000. The 4-week moving average of initial claims declined modestly but is still modestly above 400,000, but modestly below the level of a year ago. Unadjusted continuing claims declined moderately sharply and are now only modestly above the level of a year ago. The 4-week moving average of continuing claims fell slightly, but is still moderately above the level of a year ago. Initial claims have not been safely enough below 400,000 to challenge the implication that payroll employment may not be growing very much at all (even though overall, household employment probably continues to grow). Unemployment won’t fall significantly until the economy begins to grow at a faster pace. The insured unemployment rate (2.9% or 2.4% unadjusted) is modestly better than during the same week in 1992 when the economy was recovering from the last recession (3.1% or 2.7% unadjusted). Initial claims were not consistently below 400,000 in 1992 until October. Initial claims are moderately lower than in the same week in 1992 (381K vs. 427K), and moderately lower than in 1992 once you strip off the dysfunctional seasonal adjustment (297K vs. 345K.) The talk about continuing claims being at or near a 20-year high is a complete red herring (true, but irrelevant) since it is the insured unemployment rate (see three sentences back) that is important and covered employment has risen by over 20% since 1992 alone. The bottom line is that although the labor market is lackluster, it’s not in too bad shape and not getting seriously worse.
The Chicago Fed National Activity Index for August registered a moderate decline, back into modestly negative territory, indicating that the economy is growing, but still somewhat “below trend”. This was a somewhat negative report. The negative value for the index was due to weak employment trends. Ex employment, the overall index would be right at zero. 53 of the 85 individual indicators comprising the index displayed below-average growth in August. 49 deteriorated between July and August. 36 improved, although 14 of these still indicated below-average growth.
The Durable Goods report for August registered a moderately sharp decline in new orders, a sharp decline in shipments, a moderately sharp rise in unfilled orders, and a moderate decline in inventories. This was a mostly negative, but mixed report. The declines were completely due to the seasonal adjustment. Basically, July is usually a down month, so the adjustment pushed July way up, causing August to look like a down month. The only bright spot was that semiconductor shipments were up very sharply. Please note that there tends to be a lot of monthly volatility for orders and shipments, primarily since few customers buy durable goods on a nice, smooth monthly cycle.
The New Home Sales report for August registered a moderate gain. This was a positive report. Housing demand continues to be strong and continues to confound and befuddle even the best of economists.
The Existing Home Sales report for August registered a sharp gain to yet another record high. This was a very positive report. Economists continue to be completely baffled by the strength of housing demand. But, economists also continue to be quite confident that demand will recede in the coming months. There is concern that rising 10-year Treasury interest rates will begin pushing people out of the housing market. The strong August sales were probably due to purchases committed in the spring when mortgage rates were lower. What economists are not doing a very good job at all at is forecasting how homebuyers will react to the potential for rising rates. My suspicion is that more fence-sitters will be more inclined to jump in sooner rather than wait for rates to rise even further. But my real suspicion is that mortgage rates are so low that even moderate increases in rates simply aren’t a big economic factor for most homebuyers.
The Mass Layoffs report for August registered a sharp decline in the number of layoff events (50 people at one location) and a sharp decline in the total number of people laid off, to the lowest levels since March. This was a positive report. There were only slightly more layoff events in August than a year ago, and modestly more workers were laid off than a year ago.
The Conference Board Help Wanted Index for August registered a slight decline in help-wanted advertising. This was a modestly negative report, but does not necessarily indicate a downwards trend. The index is still moderately below the level of a year ago. The Conference Board refers to their Help-Wanted Advertising Index as a “key barometer of America’s job market”. They opine that “With the economy on the upturn, a labor market turnaround may finally develop. After shedding nearly 3 million workers, layoffs have stabilized and could start slowing down. But while total job advertising volume is stabilizing, it is at very low levels.” The good news is that a higher percentage of labor markets have a rising wand-ad volume (45%) than in July (35%). I would note that in today’s job market and with the internet, companies simply don’t have to do as much newspaper advertising.
After the close: AMG Data Services reported that for the week ended Wednesday, September 24, $1.4 billion flowed into equity mutual funds, mostly to domestic funds. This was a positive report. This is good news, because it says that mutual funds money flows were not the cause of the declines on Monday and Wednesday and that equity fund inflows continue to be a rising tide that will tend to push the market higher. $70 million flowed out of taxable bond funds. $12.3 billion flowed out of money market funds. $225 million flowed out of municipal bond funds, the tenth consecutive week of outflows. $195 million flowed into international and global debt funds, accounting for some of the downwards pressure on the dollar.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 1.91% on Thursday to 23.42, which is in the upper half of the moderate anxiety (low complacency) zone (20 to 25). VIX actually spiked higher, up to 23.90 around 10:30 a.m. as the market hit its morning low and then bounced. VIX did spike again into the close as the market headed for its low of the day into the close, but VIX didn’t spike as high as in the morning.
The Nasdaq-100 After Hours Indicator had a negative tone for the Thursday evening session, closing down 1.42 points. There was no particular news to account for the decline. Most likely it was simply that people are finally willing to throw in the towel and stand back and wait for the market to stabilize. That’s actually a contrarian positive signal.
[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 rose moderately against the yen and fell slightly 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 modestly, but is still well below the $30 “comfort” level. 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 fell 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.
[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.
[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.
Traders and short-term speculators will tend to close out positions (or at least hedge them) in advance of the weekend when anything can happen.
Nasdaq is even more ‘overbought’ on a short-term technical basis. This argues for a strong bounce, but says nothing about the timing. Since we continue to see inflows into stock mutual funds, it’s only a matter of time before the upwards pressure of those inflows overcomes any downwards selling pressure.
There are only three trading days left in the month (and quarter), so we could see some ‘window dressing’ buying.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at + on day, well above the midpoint 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 242 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 134 days. Nasdaq is 5 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 33 days old and 5 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. This leg is now rather ‘limp’, and will be so until it sets a new closing high,
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 11 days old and 5 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. Unfortunately, this leg is now clearly dead, having set a closing level (1,817.24) below its starting level (1,819.42). We now start looking again for a potential start of a new up-leg. That requires a close at least modestly above the intra-day low.
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 35 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 declines such as we saw on Wednesday and Thursday are 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 26, 2003 01:14:59 AM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology