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(Updated since Saturday – changes marked with [ * ])
People blame Microsoft (MSFT) for the continuation of the sell-off on Friday, but that was simply the excuse de jour, with the real reason for the sell-off being simply profit-taking by traders and speculators after the recent strong run-up. Similar to Thursday, Nasdaq performed better than the moderate decline (20 points) would suggest, closing 2 points above the opening level and 24 points above the intra-day low. The low was set at 2:00 p.m. and Nasdaq rose sharply into the close.
Once again, we saw a sharp decline (17 points) in the pre-market, a modest additional decline at the open (5 points), another modest decline (6 points) in the first minutes of trading, and then the selling pressure petered out. It wasn’t until 11:30 a.m. that Nasdaq finally moved below the level it was at 10 minutes after the open. Nasdaq did appear to fall off a cliff at 11:30 a.m. on no apparent news, suggesting that quite a few people simply threw in the towel (also known as capitulation) and decided to wait for the selling to abate and some substantial buying to occur. The strong bounce from the 2:00 p.m. intra-day low strongly suggests that we may have finally hit bottom for this correction.
Volume was almost heavy (1.94 billion shares). Breadth was moderately negative, with 1.40 losers for each gainer. Similar to Thursday’s trading, normally this would be considered a moderate sell-off (breadth was too modest to be a solid sell-off), but the fact is that this almost heavy volume resulted in a net gain from the opening price level.
According to Thomson Financial I-Watch, institutional investors were net buyers of Microsoft (MSFT), JDS Uniphase (JDSU), Sun (SUNW), Cisco (CSCO), EMC (EMC), Nortel (NT), Oracle (ORCL), Intel (INTC), and Gateway (GTW). Institutions were heavily buying the dip, strongly suggesting that the market is not about to dramatically fall off a cliff any time in the near future. Institutions were heavy buyers of Microsoft.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp gain (erasing most of last week’s decline) but its six-month smoothed growth rate declined modestly. This was a mostly positive report, suggesting reasonably strong 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.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a moderate decline (2 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended October 24th. This was a positive report.
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, fell by 0.89% on Friday to 18.93, which is moderately below the top end of the low anxiety (moderate complacency) zone (15 to 20). People were somewhat relieved by the market bounce in the late afternoon. VIX jumped on the open to 19.82 and spent some time above 20.25 during the afternoon dip, but fell sharply as the market recovered into the close. 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 0.17% on Friday to 17.71.
The Nasdaq-100 VIX (VXN) fell by 2.45% on Friday to 25.45.
The Nasdaq-100 After Hours Indicator had a negative tone for the Friday evening session, closing down 0.85 points. People are still modestly despondent over recent losses and now a bit gun-shy and not quite yet ready to dive back into the market. In some sense, this is a good sign since it shows that a fair amount of the superficial optimism has now rightfully been washed away.
[10/24/03] 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 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.
[ * ] Many people are waiting anxiously for a Senate hearing on Thursday at which Treasury Secretary Snow will present the regular report on foreign exchange policy. There has been a lot of intense clamoring for the U.S. to ‘force’ China to float its currency and alleging that China has been ‘manipulating’ its currency to keep it weaker than the dollar to make goods from China cheaper in the U.S. A lot of the debate has been completely disingenuous. China currently has what is known as a ‘pegged’ or fixed exchange rate which is the antithesis of a manipulated rate (as long as the peg rate remains constant, which it has) and designed to keep the currency stable while their economy gradually matures. Eventually their economy will be mature, stable, and large enough to be able to withstand the rigors of a vigorous foreign exchange market where speculators daily bet large quantities of money on changes in exchange rates. The U.S. has already hinted that China should convert to a floating exchange rate, but I’m sure that Treasury fully comprehends that the timing of such a change needs to take into account the pace of the evolution of the internal structure of China’s economy. The ultimate issue is whether the Chinese economy is strong enough to be able to withstand the rapid fluctuations of foreign exchange rates that will come as soon as speculative ‘hot money’ artificially begins to manipulate exchange rates. Foreign exchange rates should be determined based on supply and demand in an open market, but market manipulation by the ‘players’ (e.g., placing bets without a real demand for a currency) must always be taken into account. Maybe China’s economy really is finally big enough and structurally sound enough, but that can only be determined by rigorous and coolheaded analysis, not by clever arguments by those with vested interests. Some of the clamoring comes from U.S. manufacturing companies and labor unions who simply have a vested interest in seeking to give their constituents an advantage over China without the need to restructure or make changes to compensation or work rules that are needed in the evolving global economy. Much of the clamoring comes from the big Wall Street banks (e.g., Goldman Sachs) who simply seek to profit from speculation and trading of the trends and fluctuations in foreign exchange rates. In other words, they simply want to ‘open’ China as a new market for their foreign exchange trading and speculating. Smaller, boutique speculation and trading firms and the financial media also chime in as the issue helps to raise market volatility (enhancing opportunity for profit) and rouse reader and viewer interest. The debate enters the political realm with the presidential election only a year away and the White House doesn’t want to unnecessarily antagonize the labor unions who assert that American jobs are being exported to China and allege that China’s foreign exchange policy is to blame. Some protectionist measures are being floated as well. The key thing to keep in mind is that most of the things that get talked about in Washington never come to fruition and simply are not worth worrying about.
The price of oil fell moderately, but is still 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 rose 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.
[ * ] Although the rocket attack on the hotel in Baghdad was quite unfortunate, there is indeed a beneficial silver lining to that dark cloud: Deputy Secretary of Defense Wolfowitz now has an indelible, first hand image of the security situation/insurgency in Iraq permanently seared into his brain. Any future decisions that he personally makes or advise that he gives will be vividly colored with his own personal experience in a way that news reports, expert analysis, and raw data and statistics can never be. The question that is now loudly reverberating within his head and all the other heads at the Pentagon and in the White House is what is needed to get this kind of attack to stop – and more quickly. Maybe they’ll send more troops, or deploy them differently. Maybe they’ll dramatically step up the pace of counter-insurgency raids. Maybe they’ll authorize counter-insurgency tactics that they’ve been reluctant to resort to so far. They may finally recognize that they need to give a dramatically higher priority to working with the UN and “Old Europe” countries. In any case, you can be absolutely sure that there will be some big changes (at least in attitude and level of cockiness) at the Pentagon and the White House as a result of this incident.
[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.
I attended a panel discussion at the New America Foundation here in Washington, D.C. on the topic of health care reform. Two of the four panelists were involved in various reform efforts over the past ten years including the failed Clinton reform in 1993/94. They summarized some of the history of reform attempts and the lessons learned. A key point is that there is incremental reform going on all the time, every year, although much of it occurs at the state level. There was a little discussion of some new ideas for universal health insurance, but one of the lessons learned is that you need wide agreement that a crisis exists before you can make any dramatic progress.
The CFTC (Commodity Futures Trading Commission) Commitments of Traders report for the week ended October 21 indicated a slight increase in the ratio of open commercial S&P 500 index futures long positions to short positions from 0.955 to 0.958, indicating that “the smart money” is slightly less bearish and have slightly decreased their betting that the S&P 500 index will decline. Traders did add to their short positions but added more than twice as many long positions. Trading of the “e-mini” S&P 500 index futures indicated a slight increase in the ratio of longs to shorts from 0.952 to 0.958 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 slight increase in the ratio of longs to shorts from 0.83 to 0.84, indicating that “the smart money” was still quite bearish, but slightly less so. Traders added to both their long and short positions, with modestly more longs than shorts. It is interesting to note how much more bearish “the smart money” are about the Nasdaq-100 than for the S&P 500 (0.84 vs. 0.96). Trading of the “mini” Nasdaq-100 index futures indicated a moderately sharp increase in the ratio of longs to shorts from 1.13 to 1.23, indicating that amateur traders were still somewhat bullish, and moderately more so. Amateur traders added to their short positions moderately but increased their long positions by four times as much. 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. And finally, we don’t know what traders were up to for the days since Tuesday.
[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.
Monday might finally be the day where we see a positive bounce after the recent correction.
The market will be on Fed Watch for the FOMC announcement due out on Tuesday afternoon. Nobody expects any rate changes, but people are anxious to hear if the Fed has revised its views on the pace of the recovery and whether rate hikes are still indefinitely on hold.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -20 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 263 days (1 year and 12 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 7 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 shown that this was a near-term market ‘top’.
We have been in a correction off of that 52-week intra-day high for 7 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 155 days. Nasdaq is 6 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 54 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, 2002.
Thursday, October 23 was Day 1 of a potential up-leg, with Nasdaq closing moderately (11 points) above the intra-day low of 1,874.11. Friday was Day 2, but Nasdaq set a new intra-day low of 1,841.62, so the potential up-leg is invalidated and we return to looking for another new leg.
Friday, October 24 was Day 1 of a potential up-leg, with Nasdaq closing sharply (24 points) above the intra-day low of 1,841.62. 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 24 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. Interestingly, the Nasdaq intra-day low on Friday was almost exactly 125 points (125.25 points to be exact) below the October 15 intra-day peak. And we did see a sharp bounce at that point, which is what we would expect to see when a correction ‘finishes’.
[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 26, 2003 11:15:19 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology