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Nasdaq set yet another new 52-week closing high (1,911.90) on Thursday, precisely on the one-year anniversary of the end of the bear market. That said, Thursday was also a yellow flag day with Nasdaq closing below its opening level of 1,916.95 (by 5 points) and well off its intra-day high of 1,936.93 (by 25 points). The point-gain for the day was less than the loss from the morning peak. Clearly there was a lot of selling into the rally by people who either wanted to lock in some profits or who were betting that the new peak would not stick for very long.
The 1935 level seemed to be tough resistance for Nasdaq and the 1900 level seemed to be solid support.
There was no dark, sinister reason for the steep decline off the intra-day high. It was simply the result of unwarranted momentum speculation by traders in the pre-market in response to the modestly better than expected jobless claims report. One of the favorite ‘games’ on Wall Street is to catch a large group of market participants leaning the wrong way and then lean heavily on them in the opposite direction to force them to eat big losses and give up their positions. There were probably a lot of people feeling that it was relatively safe to short the market at the lofty level of Wednesday, especially after seeing the weakness on Tuesday. The jobless claims report was a welcome relief, but not so fantastic as the pre-market trading suggested. Basically, traders ganged up on the shorts (a so-called short-squeeze), causing shorts to do their own buying to cover their short positions, which inspired a cascade of more momentum buying and more short covering. By the open, Nasdaq started up 23 points. The cascade of momentum buying and short-covering continued until all the momentum money and weak-willed short-covering petered out at the intra-day peak around 11:40 a.m. Nasdaq then hovered in a narrow range until shortly after 2:00 p.m., when the momentum day traders began to take their profits. Once the momentum was broken, Nasdaq fell like a rock, declining by over 30 points in less than an hour. Nasdaq was able to bounce back over 12 points in the final hour of trading, suggesting that part of the steep decline was due to day traders shorting the market. The steep decline also destroyed the confidence of any new buyers, who then dumped their positions out of fear than they had made a big mistake.
There were some other ‘catalysts’ that affected the market, but most of them were already known when Nasdaq-100 futures were up only a few points ahead of the 8:30 a.m. jobless claims report.
The pre-market trading was a gross distortion of the market dynamics, a ‘shock’ that the market needed to recover from, so it’s difficult to say where the market might have closed without all of the frenetic pre-market trading.
Volume was heavy (2.07 billion shares). Breadth was moderately positive, with 1.52 gainers for each loser. This would have been a solid rally, except that there was such heavy profit-taking off the morning peak, plus breadth was not as strong as we’d like to see.
According to Thomson Financial I-Watch, institutional investors were net sellers of Intel (INTC), Sun (SUNW), Cisco (CSCO), Lucent (LU), JDS Uniphase (JDSU), EMC (EMC), and Brocade (BRCD), but net buyers of Microsoft (MSFT) and Oracle (ORCL). Institutions were heavily selling into the rally, but that’s what they usually do after buying on any recent dips. They sold not just during the decline in the afternoon, but all day long. This is not to say that the market is on the verge of a dramatic decline, but simply that institutions are prone to selling whenever they sense an irrational surge such as we saw in the pre-market.
The Unemployment Insurance Weekly Claims report registered a moderate decline in initial claims – still under 400K for a third consecutive week (although last week was revised to modestly above 400K) – and a slight decline in continuing claims. This was a positive report. Unadjusted initial claims rose moderately to 333K, moderately below the year-ago level of 366K – and well under 400K. The 4-week moving average of initial claims declined moderately and is now modestly below 400,000, and moderately below the level of a year ago. Unadjusted continuing claims declined modestly and are still only modestly above the level of a year ago. The 4-week moving average of continuing claims declined slightly, and is still moderately above the level of a year ago. Initial claims have not been safely enough below 400K 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 and the pace of business restructuring slows down. 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 2.5% unadjusted). Initial claims were not consistently below 400K in 1992 until October. Initial claims are moderately lower than in the same week in 1992 (382K vs. 398K), but modestly higher than in 1992 once you strip off the dysfunctional seasonal adjustment (333K vs. 327K.) 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 21% 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 Chain Store Sales report for September registered a sharp rise compared to a year ago. This was a positive report. There is some concern that a good part of this rise is a one-time effect due to the tax cut stimulus.
The Import and Export Prices report for September registered a moderate decline in import prices, or a modest rise ex oil, and a moderate rise in export prices, or a slight decline ex agriculture. This was a mixed, relatively neutral, but slight negative report. Exports are not seeing any significant benefit of the “weaker dollar”, but that’s simply because demand is down due to economic weakness abroad. The global economy will pick up as the U.S. economy picks up, but with a delay. Like it or not, we lead the rest of the world.
After the close: AMG Data Services reported that for the week ended Wednesday, October 8, $3.59 billion flowed into equity mutual funds, but $1.57 billion of that flowed into international funds and $755 million into small-cap funds. This was a positive report, and more than makes up for the $2.2 billion outflow reported last week. $181 million flowed into real estate funds, the largest inflow in almost seven years. $68.5 million flowed into healthcare/biotech funds, the largest inflow since October 2002. $578 million flowed into taxable bond funds. $28.6 billion flowed into money market funds. $376 million flowed out of municipal bond funds, the twelfth consecutive week of outflows.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 2.83% on Thursday to 19.58, which is modestly below the top end of the low anxiety (moderate complacency) zone (15 to 20). People were relieved to see the market continue to advance. The bears will once again beat their drums about the market being filled with the kind of excessive complacency that frequently presages a dramatic market decline. I wouldn’t bet the farm on that outcome, but it is a yellow flag.
The Nasdaq-100 After Hours Indicator had a mostly positive tone for the Thursday evening session, closing up 0.53 points. The after-hours news flow was reasonably positive.
[10/7/03] 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 against the yen but rose moderately sharply 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, and is now moderately above the $30 “comfort” level. Some people were blaming unrest in Iraq or weather issues, but most likely it was simply short-covering and associated momentum trades after the recent move down. 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 very 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.
There are a few economic reports today, but nothing that would dramatically “move the market”.
Traders may be in the mood to take some more profits, but it is worth noting that the latest mutual fund data from AMG indicates that there is still a fair amount of money flowing into stock mutual funds that should continue to keep the tide rising up under the market.
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.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +18 on Thursday, 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 252 days (1 year and 1 day). 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 144 days. Nasdaq is at its closing peak (1,911.90 on October 9 – previous peaks were 1,909.55 on September 18, 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 43 days old and at 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 still somewhat ‘limp’, and will be so until it sets a new closing high at least 1% above the previous peak of 1,909.55 (1,909.55 + 19.10 = 1,928.65).
We are still in a minor correction off the September 18th 1,909.55 closing high. We do seem to be recovering nicely from the correction, but the process won’t be complete until we set a new closing high at least 1% above the level where the correction started (1,909.55 + 19.10 = 1,928.65).
Wednesday, October 1st was Day 1 of a potential up-leg, with Nasdaq closing well above the intra-day low of 1784 (approximately). Thursday was Day 2, but it doesn’t matter what happens on days 2 and 3 as long as a new low is not set. Friday was Day 3 and we saw a really nice gain, but it doesn’t matter since that was another one of the days on which the market tries to find its feet before we really see a confirmation. Monday was Day 4, but the point gain and volume were too meager to constitute a confirmation. Tuesday was Day 5, but the moderate point gain and moderate volume were not enough to signal a confirmation. Wednesday was Day 6, but Nasdaq backtracked. Thursday was Day 7, but the closing point gain was somewhat short of 1%. On days 4 through 10 we look for a confirmation of the new up-leg with a 1% gain on higher volume than the previous day. Until we get confirmation, Nasdaq is unlikely to move comfortably above the low 1900 level in a sustainable manner.
At its intra-day peak of 1,936.93 on Thursday, October 9, Nasdaq probably had upwards of 50 to 140 points of “trading froth”. Closing well off that peak, Nasdaq probably has 50 to 115 points of potential “froth” remaining that traders could easily burn off before we would start saying that a serious correction was in progress.
[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: October 10, 2003 12:20:16 AM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology