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(Updated since Saturday – changes marked with [ * ])
(Please note that I will not be posting columns for Tuesday, Wednesday, or Thursday since I will be attending a venture capital conference in Boston)
The decline on Friday was more of the same, with people simply waiting to see some more convincing evidence that the recent sell-off is over before they step deeper into the market. There are probably some people who anxiously take a little more money off the table with every passing lackluster day. There are probably also people who have tighter ‘stops’ on their positions and are getting ‘stopped out’ as traders test the ability of the market to hold up to some selling pressure.
The economic data was mixed and was certainly not a reason to abandon the market.
Volume was moderate (1.83 billion shares). Breadth was strongly negative, with 2.87 losers for each gainer. This was another solid sell-off, although volume wasn’t very heavy. This is another yellow flag.
According to Thomson Financial I-Watch, institutional investors were net buyers of Intel (INTC), Sun (SUNW), Microsoft (MSFT), Oracle (ORCL), Cisco (CSCO), Motorola (MOT), EMC (EMC), JDS Uniphase (JDSU), and Applied Materials (AMAT). Clearly institutions were buying the dip, strongly suggesting that the market was not about to dramatically fall off a cliff any time soon.
The final estimate Gross Domestic Product (GDP) report for Q2 registered a moderately higher than expected gain in real GDP growth (3.3%). This was a positive report, but it’s ancient history, mostly modest accounting adjustments, and gives us little guidance about the economy in the coming months (or even in the past three months). I wouldn’t get too excited about the 3%+ growth rate since a fraction of it was probably simply economic activity that was shifted from February and March into May and June due to anxiety over the war in Iraq.
The final (revised) University of Michigan Consumer Sentiment Survey for September registered a moderate decline from both the final August and preliminary September readings, and for both the present conditions and expectations components. This was a negative report. People chattered that this decline was “unexpected”, but it shouldn’t have been if people had been following the weekly ABC News/Money magazine Consumer Comfort Index which has fallen off in recent weeks. Please note that there is no clear and indisputable link between consumer confidence reports and future consumer spending.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a moderate decline, and its six-month smoothed growth rate rose slightly (but is still off its peak seven weeks ago). This was a mixed, but somewhat negative report. The WLI is indicating at least moderate economic growth in the months ahead.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a very sharp decline (10.26 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended September 26th. This was a positive report. The end of the summer driving season and “abundant supplies” were blamed for the decline. But even with the decline, gasoline still costs 19 cents more than a year ago.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 1.62% on Friday to 23.80, which is in the upper half of the moderate anxiety (low complacency) zone (20 to 25). People were a little more disappointed that the market hasn’t begun recovering from the recent sell-off. VIX spiked as high as 24.89 shortly before 12:30 p.m., but didn’t spike up anywhere near that high when the market fell below that earlier low in the final hour of trading.
The Nasdaq-100 After Hours Indicator had a positive tone for the Friday evening session, closing up 0.97 points. People feel that the sell-off has been way overdone, but they’re rather reluctant to stick their necks 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 modestly against the yen but rose modestly 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 fell modestly, and is still moderately 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 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.
[ * ] The Pentagon announced that they will be mobilizing two additional brigades of Army National Guard troops in early October, plus “alerting” a third brigade which may be mobilized within the coming months. A brigade is 5,000 troops, so this is 10,000 being mobilized plus 5,000 being alerted. This is mixed news. The upside is that troops with needed skills will be placed where those skills are needed to help stabilize Iraq. The downside is that the U.S. is getting a little deeper into Iraq when we would have hoped to be getting out. It’s not clear whether these specific additional troops will be performing additional, new tasks or simply filling in where existing troops may be rotating out or taking the recently-announced “R&R”. Or, whether the troops are more for reconstruction than for security stabilization (fighting holdouts and other combat duties). But, the Pentagon announcement did explicitly say that “These mobilizations are part of the force rotation plan announced on July 23, 2003.” Also see the initial announcement. The bad news is that these additional mobilizations are due to the fact that other countries aren’t offering the troops that are needed. The good news is that the U.S. is incrementally adjusting its plans to be more realistic and effective. Overall, this is relatively positive news since it does offer some benefit despite the downside.
[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.
The CFTC (Commodity Futures Trading Commission) Commitments of Traders report for the week ended September 23 indicated a moderate increase in the ratio of open commercial S&P 500 index futures long positions to short positions from 0.95 to 0.99, indicating that “the smart money” has moderately decreased their betting that the S&P 500 index will decline. They’re about as close to neutral as you can get. Traders cut both long and short positions sharply. Trading of the “e-mini” S&P 500 index futures indicated a very sharp decrease in the ratio of longs to shorts from 1.14 to 0.54 indicating that amateur traders have shifted from being moderately bullish to being very bearish. They cut both their long and short positions very sharply, but cut their longs by twice as much. In other words, quite a number of amateurs were betting that the market would fall. Maybe these were the same type of people who have been behind the recent sell-off. Trading of the Nasdaq-100 index futures indicated a slight increase in the ratio of longs to shorts from 0.761 to 0.767, indicating that “the smart money” was still quite bearish, but slightly less so. Traders cut both their long and short positions sharply. Trading of the “mini” Nasdaq-100 index futures indicated a moderately sharp decrease in the ratio of longs to shorts from 1.35 to 1.18, indicating that amateur traders were still rather bullish, but much less so. Amateur traders cut both their long and short positions very sharply. In general, the “smart money” tends to be more “right” than the amateurs. But, the smart money can be a contrarian indicator as it moves to a limit at which point it will tend to reverse. Note: All of these contracts had very dramatic reductions of both long and short positions. I don’t have an explanation, but it does seem rather coincidental.
[ * ] From Thursday: Levi Strauss & Co. announced that it will close its remaining manufacturing and finishing plants in North America by year-end as part of the shift away from owned-and-operated manufacturing. Although a total of close to 2,000 jobs are being cut, only 800 of those are in the U.S., with the remaining 1,080 in Canada. Still, it is this kind of restructuring that continues to be a drag on the economy, especially employment. The good news is that every one of these layoffs brings us one step closer to the end of the drag. Note that Levi Strauss is not a publicly traded company.
[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.
Regardless of the news, people will continue to wait for some more convincing evidence that the sell-off is over. Until then, traders are more than happy to continuing betting on a decline.
Nasdaq is very clearly very ‘oversold’ on a short-term technical basis, so we are overdue for a bounce, although the timing is uncertain.
My forecast for Monday is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -25 on Friday, well below 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 243 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 135 days. Nasdaq is 6 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 34 days old and 6 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,
We are now in a minor correction off the September 18th 1,909.55 closing high. We are now looking 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, September 19th, I would now estimate that we still have up to another 10 points of froth that traders could burn through before we would have to conclude that a major correction was underway. It’s quite possible for short-sellers to push the market down moderately more than the trading froth range, but not too far and not for too long as long as business fundamentals are improving and money is flowing into stock mutual funds. I continue to believe that declines such as we saw on Wednesday and Thursday and Friday are well within the range of the “trading froth” in the market, so that we’re probably just seeing precisely the kind of ‘action’ (actually, ‘reaction’) 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 28, 2003 10:55:35 PM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology