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(Will be updated for Monday)
Friday may have been a classic example of “buy the rumor and sell the news” selling, with the market running up to new 52-week high in advance of the employment report, but then trading down even though the news was even better than expected. It was also a perfect example of traders excessively running up stocks in the pre-market, to the point that buying exhaustion was reach shortly after the open. In that scenario, traders simply reverse and bet on a decline. The good news is that Nasdaq set yet another 52-week intra-day high, but the bad news is that people sold off stocks in response to that peak.
Nasdaq hit its morning low shortly after 10:00 a.m. and tried to bounce, but petered out again and set a new intra-day low shortly after 12:30 p.m. Nasdaq bounced back from that low, but by 2:30 p.m. the buying petered out again. The 1989/1990 level provided too much resistance. Nasdaq drooped down again and shortly after 3:30 p.m. fell off a cliff, falling 12 points in 20 minutes, but recovering a few points into the close.
Nasdaq closed 16 points below its opening level, even with great news. That’s a clear yellow flag. Nasdaq set a new 52-week intra-day high and then closed 22 points below that high. That’s a second clear yellow flag. It’s too soon to know for sure whether this was a near-term ‘market top’. The selling may simply have been due to traders closing positions ahead of the weekend. And the new intra-day high and then retracement may simply have been day trading.
In any case, clearly there are a bunch of people who seriously believe that the market is overextended, or at least overbought on a short-term technical basis.
Volume was almost heavy (1.93 billion shares). Breadth was slightly positive, with 1.03 gainers for each loser. Positive breadth on a decline suggests that people were dumping large-cap stocks but buying smaller-cap stocks. Heavy volume on a modest decline suggests that there was a lot of selling into the rally, even as others were buying.
There was no data reported on Friday for Thomson Financial I-Watch.
The Employment Situation report for October registered a moderate rise in nonfarm payroll employment and a slight decline in the unemployment rate. This was a positive report, but even two ‘good’ months do not establish a trend. The headline job gain was 126,000, which is still statistically insignificant. Ex the seasonal adjustment, we gained 822,000 nonfarm payroll jobs, which is statistically significant. The 57,000 headline decline for September was revised up to a gain of 125,000 jobs. Manufacturing lost another 24,000 jobs, or 45,000 ex adjustment, which is a slower pace of decline. Temporary help (a leading indicator of future employment) was up 16,900 (or 17,400 ex adjustment). Unemployment fell by 194,000, and that was really a reduction of 267,000 ex adjustment. There was a slight increase of 12,000 in the number of people who were no longer in the labor force, but that was really a reduction of 360,000 ex adjustment. The population grew by 260,000. Household employment rose by 441,000, but ex adjustment rose by 888,000, and is higher than a year ago by 1.07 million, its highest level ever. Nonfarm payroll employment is now 2.3 million below the peak level in November 2000. Hourly earnings rose slightly, and the average weekly earnings rose modestly. The average workweek rose slightly, but the average manufacturing workweek was unchanged. Manufacturing overtime was also unchanged. Computer and electronic product firms saw a loss of 6,600 jobs or 2,400 ex adjustment. The household survey covers the calendar week containing the 12th of the month, and the payroll survey covers the pay period that includes the 12th. Please note that employment is a lagging indicator for economic activity and won’t show any dramatic growth until GDP growth kicks up above 4% for several quarters (assuming productivity remains high). Despite the heartening appearance of the headline number, the labor market is actually doing merely ‘okay’ for right now since output is still picking up at a relatively gradual pace (relative to productivity growth).
The Wholesale Trade report for September registered a moderate gain in sales of merchant wholesalers, a moderate gain in inventories, and a slight decline in the inventories/sales ratio. This was a positive report. It is good to see wholesalers a little more comfortable boosting inventories (in anticipation of better business ahead). Inventories and sales were even better once you remove the seasonal adjustment. Sales of computer equipment were very strong, but inventories declined, which may be a good thing for tech equipment.
The Consumer Credit report for September registered a moderate rise in outstanding consumer credit. This was a slightly positive report. Expansion of consumer borrowing is normally a key part of a recovery, but since we haven’t had a massive correction of consumer debt due to bankruptcies, we wouldn’t want to see a huge rise of consumer debt here. Note that home mortgages are not counted as “consumer debt”.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp rise – to its highest level ever – but its six-month smoothed growth rate was unchanged (but still quite strong). This was a positive report, suggesting reasonably strong growth in the months ahead.
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 0.11% on Friday to 17.56, which is only modestly above the midpoint of the low anxiety (moderate complacency) zone (15 to 20). There was no real change in the anxiety level even though the market failed to rally in the face of the positive employment report. 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 1.14% on Friday to 16.93.
The Nasdaq-100 VIX (VXN) fell by 0.59% on day to 25.20.
The Nasdaq-100 After Hours Indicator had a negative tone for the Friday evening session, closing down 1.15 points. People were a little spooked by inability of the market to rally in the face of the good employment report.
[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 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 rose very sharply, and is now moderately 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 moderately 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.
The CFTC (Commodity Futures Trading Commission) Commitments of Traders report for the week ended November 4 indicated a slight decrease in the ratio of open commercial S&P 500 index futures long positions to short positions from 0.949 to 0.942, indicating that “the smart money” is slightly more bearish and have slightly increased their betting that the S&P 500 index will decline. Traders cut their long positions modestly and added more than five times as many short positions. Trading of the “e-mini” S&P 500 index futures indicated a moderate increase in the ratio of longs to shorts from 0.85 to 0.90 indicating that amateur traders are modestly less bearish. They added moderately to their short positions, but added twice as many long positions. Trading of the Nasdaq-100 index futures indicated a moderately sharp decrease in the ratio of longs to shorts from 0.78 to 0.71, indicating that “the smart money” was still quite bearish, and significantly more so. Traders cut their long positions moderately and increased their short positions by about the same amount. Trading of the “mini” Nasdaq-100 index futures indicated a moderately sharp increase in the ratio of longs to shorts from 1.15 to 1.22, indicating that amateur traders were still somewhat bullish, and moderately more so. Amateur traders cut their long positions modestly and cut their short positions by fifteen 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 during the days since Tuesday.
I attended a panel discussion at the American Enterprise Institute here in Washington, D.C. on the topic of the effects of the 2001 tax rebates on consumer spending. The main presenter did a detailed study of consumer spending patterns before, during, and after the 2001 tax rebate checks were mailed. This included analysis of a government survey of consumers which covered when consumers got the check, how much they got, and how they disposed of the money. The study is still not final, but preliminary results show that consumers spent a third of the money during the first three months in which the payment arrived and another third in the following six months. After the paper was presented, two ‘discussants’, including an economist from the Federal Reserve Board, critiqued it. It’s still too soon to know how to extrapolate the 2001 study results to the 2003 tax rebate.
[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 certainly people who believe that the market is overextended and overbought, but that is not to say that the market can’t move even higher. After all, a bull market is supposed to climb a wall of worry. A lot of these people would love to short the market and watch it go down, but with the growing strength of the economy, the shorts will tend to be a bit more cautious. In any case, the balance of supply and demand will dictate the direction of the market, and short-term momentum traders will do their best to ferret out and punish both bulls and bears who get caught leaning too far in either direction.
One of the biggest wildcards is whether we will see any significant additional outflows from stock mutual funds due to the recent trading abuse scandals. It may depend on whether we get many more reports of abuses. My feeling is that those who were going to sell have done so already.
My forecast for Monday is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -5.63 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 272 days (1 year and 22 days). The market now has a longer-term upwards bias despite near-term volatility. The path of the market through the end of the year is of course uncertain, but Nasdaq will most likely be moderately higher at the end of December than where it was at the beginning of November. Nasdaq should break above the 2,000 level fairly soon, so the question is whether we hit 2,100, 2,250, or even 2,500 by the end of the year. 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 set a new 52-week intra-day high of 1,992.27 on November 7. The previous intra-day highs were 1,977.91 on November 6, 1,971.38 on November 4, 1,969.26 on November 3, 1,966.87 on October 15, 1,943.33 on October 14, and 1,940.97 on October 13.
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 165 days. Nasdaq is 1 day off its closing peak of 1,976.37 on November 6 (previous peaks were 1,967.70 on November 3, 1,950.14 on October 16, 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 64 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.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, October 24 with an intra-day low of 1,841.62 is now 11 days old and 1 day off its closing peak. This is a minor leg nested within the larger leg that started on August 8 which is itself nested in the larger advance that started on March 12. Multiple nested up-legs are a sign of deep strength in the market.
[11/5/03] The latest economic data continues to support the thesis that the U.S. economy is solidly into a gradual, zigzag, underappreciated, stealth recovery. The Q3 GDP report certainly convinced a lot of people that the economy is stronger than previously thought, but the cynics continue to promote the idea that the recent strength was almost solely due to short-term fiscal stimulus. I disagree. I believe that the economy would have been reasonably strong without the stimulus (ala Q2) and that we will see incremental improvement (compared to Q2) over the next four quarters. Some people will be shocked or raise alarm when Q4 comes in ‘weaker’ than the ‘artificially sweetened’ Q3, but there is no reason for alarm. That’s part of the zigzag process. The two key factors driving the pace of the recovery will continue to be the ongoing process of shutting down or restructuring ‘problem’ businesses and the pace of the formation of new businesses which will create new jobs.
[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: November 07, 2003 11:26:45 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology