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(Updated since Saturday – changes marked with [ * ])
Friday was a classic “throw in the towel” sell-off for Nasdaq with no serious attempt to recover after the initial wave of selling abated. People could smell that a sell-off was brewing and decided to simply stand back (or go short) and wait for clear confirmation that the dust has settled. Nonetheless, the selling was rather short in duration, with more than 80% of the Nasdaq decline having occurred by shortly after 11:00 a.m. Nasdaq lost less than 7 points for the entire rest of the day. Nasdaq did manage to claw back a whole 2.12 points in the final hour of trading. In short, this was a modest bout of profit-taking rather than the end of the March and August advances.
People were quick to blame “valuation concerns” for the decline, but I would be more inclined to blame technical concerns rather than valuation fundamentals. Besides, the economic reports (which ultimately form the basis for the environment in which business revenues and earnings will be generated) were fairly decent. Nasdaq had been very clearly ‘overbought’ on a short-term technical basis, so a little alleged ‘bad’ news from a couple of companies such as eBay (EBAY) and Sun (SUNW) was merely a good excuse for traders and short-term speculators to push the market down. There were probably plenty of tight ‘stop’ orders in place that were quickly triggered once Nasdaq showed more than a little weakness.
It’s unclear whether there was any significant ‘real’ selling behind the decline or whether it was simply short-term momentum speculators taking some profits. I strongly suspect the latter.
Volume was moderate (1.74 billion shares). Breadth was strongly negative, with 2.26 losers for each gainer. The lightness of the volume prevented this from being seen as a major sell-off.
According to Thomson Financial I-Watch, institutional investors were net sellers of Intel (INTC) and EMC (EMC), but net buyers of Sun (SUNW), Cisco (CSCO), JDS Uniphase (JDSU), AMD (AMD), Applied Materials (AMAT), Microsoft (MSFT), and Oracle (ORCL). Institutions were clearly buying the dip, strongly suggesting that the market is unlikely to dramatically fall off a cliff any time soon.
The preliminary Michigan Consumer Sentiment Index for October registered moderate rise back above the level in August, with a modest rise in the ‘expectations’ index and a moderately sharp rise in the ‘present conditions’ index (highest level since May 2002). This was a positive report. At this stage, consumers probably need to see some clear improvement in the labor market and in Iraq before they start getting a lot more optimistic. The recent declines are not ominous in any way, but merely reflect a modest loss of the emotional momentum that kicked off with the war in Iraq. Please note that there is no clear and indisputable link to suggest that the various consumer confidence surveys can be used to forecast future consumer spending.
The New Residential Construction report for September registered a moderate decline in building permits, a moderate rise in housing starts, and a sharp rise in housing completions. This was a mixed, most mostly positive report. Housing demand continues to be quite strong and continues to baffle and befuddle the economists.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp decline (off its highest level ever last week) and its six-month smoothed growth rate declined sharply. This was a negative report, but the WLI is still indicating at least moderate economic growth in the months ahead. What we could be seeing is evidence that Q3 could be very strong, Q4 somewhat less strong, and then some moderation of growth in Q1 and Q2 of 2004.
NOTICE: I am still using the “old” VIX even though CBOE began offering the “new” VIX on September 22nd. The old VIX is based on options for the S&P 100 index whereas the new VIX is based on options for the more popular S&P 500 index. I’m still investigating how to switch over to the new VIX and how that relates to historical data.
The old CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 0.37% on Friday to 19.19, which is modestly below the top end of the low anxiety (moderate complacency) zone (15 to 20). There was no significant rise in anxiety despite the sharp Nasdaq decline, suggesting that people viewed the sell-off as a modest bout of simple profit-taking. The bears will continue to 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 new VIX rose by 2.50% on Friday to 17.62.
The Nasdaq-100 After Hours Indicator had a modestly negative tone for the Friday evening session, closing down 0.35 points. People remain quite confused as to which direction they expect the market to move next. There still is a fair amount of optimism, but people are also somewhat cautious.
[10/18/03] 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 April. 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 and 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 very sharply, and is now only modestly above 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. In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[ * ] With the big election coming up in just over a year, the administration simply cannot afford to be seen as being ‘adventurous’ in the coming 13 months, so, the administration won’t be stirring up the many geopolitical ‘pots’ during that time. Primarily this means that the White House will be trying to get a better handle on Iraq and otherwise ‘managing’ the other geopolitical issues. But most importantly, this means that we won’t be starting any new wars (with, say, Iran or Syria or North Korea). The overall approach with the various problem countries will be to continue to talk tough, but then to quietly make accommodations.
[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.
The CFTC (Commodity Futures Trading Commission) Commitments of Traders report for the week ended October 14 indicated a slight decrease in the ratio of open commercial S&P 500 index futures long positions to short positions from 0.97 to 0.96, indicating that “the smart money” is slightly more bearish and have slightly increased their betting that the S&P 500 index will decline. Traders did add to their long positions but added five times as many short positions. Trading of the “e-mini” S&P 500 index futures indicated a slight increase in the ratio of longs to shorts from 0.94 to 0.95 indicating that amateur traders are slightly less bearish. They added moderately to their short positions, but boosted their long positions by even more. In other words, quite a number of amateurs are bearish, but an increasing number are bullish. Trading of the Nasdaq-100 index futures indicated a modest increase in the ratio of longs to shorts from 0.81 to 0.83, indicating that “the smart money” was still quite bearish, but modestly less so. Traders added to both their long and short positions. Trading of the “mini” Nasdaq-100 index futures indicated a moderately sharp decrease in the ratio of longs to shorts from 1.26 to 1.13, indicating that amateur traders were still somewhat bullish, but moderately less so. Amateur traders added to their long positions slightly but increased their short positions sharply. In general, the “smart money” tends to be more “right” (eventually) 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. Also, it is not possible to tell with any certainty whether a position is truly an outright bet or merely a hedge for some other position.
[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.
We could see some more profit-taking, or we could see a classic “recovery bounce”, although a classic “dead cat bounce” is also possible. The latter would be due to the ‘new’ shorts who piled onto the decline on Friday but who have a low tolerance for seeing the market move against them. Basically, traders and short-term speculators will chase the momentum no matter where it goes.
[ * ] Nasdaq is no longer ‘overbought’ on a short-term technical basis. That’s not to say that we won’t see a further decline, but simply that short-term traders won’t feel compelled to try to push down the market further. Short-term speculators, including so-called ‘swing traders’ may feel compelled to see the market fall further before jumping back in. The two wildcards are short sellers who will begin itching to take profits and the continued inflow of money into mutual funds. These competing forces will struggle to find an equilibrium, with short-term news flow such as quarterly reports and economic reports merely serving as the backdrop for the real action.
[ * ] Traders could do some more positioning based on both expectations and results for quarterly reports. In some cases they could do some more selling in advance of the reports. In other cases they could bid stocks up in advance of the reports and then sell as soon as the news comes out. And in other cases we could see some strong rallying after the actual news. Ultimately, all of this trading relative to quarterly reports is simply noise that will be washed out once the quarterly reporting season winds down and mutual fund money flows will still provide the underlying trend.
My forecast for Monday is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -38 on Friday, only modestly above 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 258 days (1 year and 7 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 than where it was at the beginning of August. The important thing is that we continue to see inflows into equity mutual funds while the economy, revenues, and earnings continue to incrementally improve.
Nasdaq is 2 days off its 52-week intra-day high of 1,966.87 on October 15. The previous intra-day highs were 1,943.33 on October 14, and 1,940.97 on October 13. Traders are acting as if that were a near-term ‘top’ for the market. It will take another week to prove or disprove that thesis.
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 149 days. Nasdaq is 1 day off its closing peak of 1,950.14 on October 16 (previous peaks were 1,943.19 on October 14, 1,933.53 on October 13, 1,915.31 on October 10, 1,911.90 on October 9, 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 49 days old and 1 day 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, 2002.
Tuesday, October 14 was Day 1 of a potential up-leg, with Nasdaq closing well above the intra-day low of 1,922.82. Wednesday was Day 2, with a modest loss, but it doesn’t matter what happens on days 2 and 3 as long as a new low is not set. Thursday was Day 3, but the gain was too small and on too low volume to be confirmation and days 2 and 3 don’t matter anyway. Friday was Day 4, but the Nasdaq decline set a new intra-day low for this leg, so the potential up-leg is clearly invalidated and we revert to looking for a new up-leg. 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.
Friday, October 17 was Day 1 of a potential up-leg, with Nasdaq closing slightly above the intra-day low of 1,910.24. Monday will be Day 2, but it doesn’t matter what happens on days 2 and 3 as long as a new intra-day low is not set. 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.
I would estimate that there were 50 to 125 points of ‘trading froth’ in Nasdaq at its intra-day peak of 1,966.87 on October 15, so I would estimate that as of Friday’s close there are up to 75 points of ‘trading froth’ left that short-term speculators could burn through without suggesting that a ‘significant’ correction was in progress. But it’s possible to lose more than that if a larger than typical crowd of short sellers crawl out of the woodwork.
[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 20, 2003 12:27:04 AM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology