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Wednesday was almost a solid sell-off for Nasdaq. The point-loss was dramatic, but volume was rather anemic. It’s not quite clear what caused the steepness of the sell-off. Sure, Amazon’s (AMZN) disappointing outlook (among others) was probably a catalyst and there was probably some “we bought the rumor, so now we sell on the news” selling. And there are plenty of other excuses. My strong suspicion is that short-term speculators simply had very tight ‘stop loss’ orders (as well as a very low threshold of pain for losses) and just a little selling triggered some of those stop orders and quickly attracted the momentum crowd and cynical short-sellers and the process quickly cascaded. It’s also possible that the uneven money flows for stock mutual funds may have left a vacuum for the day or maybe there were some modest outflows to accelerate the sell-off. In any case, once the selling got strong enough, most buyers decided it would be better to simply sit and wait until not only the dust settles, but a higher volume of adventurous buyers show up. Traders were getting anxious to engage in a little air-clearing profit-taking anyway, so they got that chance on Wednesday.
41% of the Nasdaq decline occurred either in the pre-market or on the open and 74% occurred by shortly before 10:00 a.m. and 86% by shortly before 11:00 a.m. Nasdaq closed only 6 points lower than the morning low. Nasdaq closed a mere 71 cents above the intra-day low which was reached shortly before 2:00 p.m. It is significant that Nasdaq did not set a new low in those final two hours of trading, strongly suggesting a fair amount of dip buying. Sure, we saw a lot of selling pressure in the pre-market and until 11:00 a.m., but very little after that. This pattern, coupled with light volume, strongly suggests that there was little in the way of significant ‘real’ selling behind the sell-off. Mostly this was simply burning off the ‘trading froth’.
Volume was almost moderate (1.70 billion shares). Breadth was very negative, with 3.00 losers for each gainer. This would easily have qualified as a strong sell-off if it weren’t for the light volume.
According to Thomson Financial I-Watch, institutional investors were net sellers of RF Micro Devices (RFMD), but net buyers of Sun (SUNW), Intel (INTC), JDS Uniphase (JDSU), Lucent (LU), Cisco (CSCO), Nortel (NT), Microsoft (MSFT), and Oracle (ORCL). Institutions were buying the dip, strongly suggesting that the market is not about to dramatically fall off a cliff any time in the near future.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a modest rise in applications, with a moderately sharp decline in refinancing being outweighed by a sharper rise in applications to purchase. This was a mixed, but relatively positive report, but there does tend to be a lot of volatility. Demand for buying homes is still quite strong.
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 6.96% on Wednesday to 19.06, which is moderately below the top end of the low anxiety (moderate complacency) zone (15 to 20). The steep sell-off brought people a little closer to reality. Oddly, there were no sharp spikes, possibly suggesting that VIX may now be broken as a capitulation indicator (at least for the near-term) due to the recent VIX changes. 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 6.77% on Wednesday to 17.67.
The Nasdaq-100 VIX (VXN) rose by 5.46% on Wednesday to 25.68.
The Nasdaq-100 After Hours Indicator had a negative tone for the Wednesday evening session, closing down 10.44 points. I’m actually not sure what caused the big decline. There were so many quarterly reports that covered a wide range, but were mostly quite good, even though there were a number of modest revenue misses and some disappointing outlooks. There was news about a major restatement by Goodyear (GT), but I don’t know why that would hurt tech stocks. Maybe there was just some rumor going around or some particularly negative interpretation or commentary that spooked after-hours traders. In any case, I couldn’t see any after-hours news that caused me any significant concern.
[10/22/03] 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 sharply against the yen and fell very 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 fell moderately, and is now modestly below the $30 “comfort” level. Traders switched from the November ‘front month’ futures to December futures, which shifted prices downwards moderately in addition to the actual decline of the December futures. 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 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, October 22, the Pentagon reports that 5,120 fewer reservists are on active duty, for a total of 158,894. This was moderately sharp decline. The Army, Air Force, Navy and Marines showed decreases in the number of reservists on active duty. The headcount has declined by 65,634 or 29% from the peak of 224,528 on May 1st.
[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.
So Lucent (LU) managed to report its first net profit in three years. That is a milestone. It doesn’t mean that happy days are here again (revenue growth is virtually nonexistent), but does illustrate the progress that many sectors of the economy are making at restructuring and refocusing on making money rather than simply illusory growth.
I attended the open meeting of the Securities and Exchange Commission (SEC) here in Washington, D.C. They reviewed four proposals for rule changes and then voted to have staff pursue the development of those proposals. One proposal related to allowing mutual fund management companies with a “manager of managers” to appoint sub-advisors reporting to the overall investment advisor without the need for a shareholder vote. Another proposal related to the disclosure that a company has to make when it is buying its own stock. Another proposal modified the rules for short-selling. The final proposal added restrictions for the use of “married puts” to circumvent the short-selling rules. I had never attended an SEC meeting, so it was interesting to see them ‘in action’. For each proposal it seemed like they had about a dozen staff members who moved up and sat at a long line of tables in front of the five commissioners and made presentations and answered questions. There were only a couple of staff that were common to each group. It did seem that much of this was scripted. The meeting lasted from 10:00 a.m. until about 11:37 a.m. At one point there must have been about 100 (non-staff) people present, but that dwindled to merely a few dozen.
I attended a panel discussion of the book The Two Percent Solution: Fixing America's Problems in Ways Liberals and Conservatives Can Love at the American Enterprise Institute. The author of the book, Matthew Miller, did a short presentation and then three ‘discussants’ critiqued the book. They were fairly critical, but there were at least a fair number of positive comments. Miller’s thesis is that a range of desirable social and economic goals can be met at a cost of no more than 2% of GDP, including better health care, subsidized living wages, and better pay for better teachers.
[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’ll have to see whether the sell-off continues or whether we see a recovery bounce.
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 gradual decline over the coming weeks and months, 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 -43 on Wednesday, modestly 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 261 days (1 year and 10 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 5 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. The sell-off has show that this was a near-term market ‘top’.
We have been in a correction off of that 52-week intra-day high for 5 days.
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 153 days. Nasdaq is 4 days 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 52 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, 2002.
Monday, October 20 was Day 1 of a potential up-leg, with Nasdaq closing well above the intra-day low of 1,905.39. Tuesday was Day 2 with a moderate gain on moderate volume, but it doesn’t matter what happens on days 2 and 3 as long as a new intra-day low is not set. Wednesday was Day 3, but we set a new intra-day low of 1,897.36, so the potential up-leg is invalidated and we return to looking for another new 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.
Wednesday, October 22 was Day 1 of a potential up-leg, with Nasdaq closing slightly (71 cents) above the intra-day low of 1,897.36. Today 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 Wednesday’s close there are up to 56 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 22, 2003 11:45:33 PM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology