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(Updated since Saturday – changes marked with [ * ])
There was no clear and obvious scapegoat to pin Friday’s market decline on. The economic data was mixed but certainly not terrible. There was no dramatic news. My suspicion is that a lot of people had fairly tight stop-loss orders in place (in order to automatically take profits if the market declined) and just a moderate amount of downwards pressure began to trigger the stops in a cascade, inviting momentum traders and shorts to pile on. Also, it was a Friday, so people had no incentive to stay in the market, especially if it was showing some weakness. Also, short-term speculators who buy into a strong rally, such as we had on Wednesday, are prone to bailing out if the market fails to show a continuation of the rally within two or three days, and they are almost certain to bail out if the market shows significant weakness. Those short-term speculators are also prone to closing their positions on a Friday ahead of the weekend.
It’s also possible that there may have been some selling of stock mutual funds since fund money flows are rather erratic and we can see strong buying one day (like Wednesday) and then strong selling another day (like Friday). The latest weekly report showed $3.5 billion flowing into stock mutual funds, but that is net and an average, so it’s very possible to see an occasional day when there may be large outflows.
Nasdaq opened roughly flat, staged a modest rally (11 points) by 10:00 a.m., and then petered out and reversed. That rally and reversal was a moderate yellow flag. The 1975 level provided too much resistance. Nasdaq fell 30 points off the morning high by 11:00 a.m. Nasdaq then staged a rather mediocre recovery that rose only 8 points by 1:15 p.m., and then began a gradual swoon, hitting a low shortly after 3:00 p.m. Nasdaq then tried to bounce a little (up to 8 points), but swooned again to match its previous low right at the close.
Nasdaq volume was moderate (1.82 billion shares). Breadth was strongly negative, with 2.04 losers for each gainer. This was a moderate sell-off, but not terribly worrisome since volume was not so heavy. Nonetheless, this sell-off warrants another yellow flag.
According to Thomson Financial I-Watch, institutional investors were net buyers of Sun (SUNW), Intel (INTC), Nortel (NT), Cisco (CSCO), JDS Uniphase (JDSU), Brocade (BRCD), Oracle (ORCL), BEA Systems (BEAS), and Microsoft (MSFT). Institutions bought the dip, strongly suggesting that the market is not about to dramatically fall off a cliff any time in the near future. This buying certainly makes up for some of the yellow flags.
The preliminary University of Michigan Consumer Sentiment Survey for November registered a moderate gain from the final October reading. This was a positive report. Both the present conditions index and the expectations index rose moderately. Please note that there is no clear and indisputable link between consumer confidence reports and future consumer spending.
The Retail Sales report for October registered a modest decline, but a modest gain ex autos. This was a mixed, but somewhat positive report. This was not a particularly encouraging report, but neither was it particularly discouraging. We have to be careful not to over-interpret this one report since the government changed its ‘sample’ (presumably to make it ‘better’). It may take a few months for the dust to settle so that we can get a clear reading of retail sales without the tax rebate effects. It’s very possible that August stole sales from September and October. There are simply too many effects in play to get a clear view of the trend, yet.
The Producer Price Index (PPI) report for October registered a sharp rise, or a moderate rise ex food and energy – food rose very sharply and energy declined slightly. This was a mostly neutral, but mixed report, with no signs of either accelerating inflation or deflation. Intermediate goods prices (a good surrogate for future consumer inflation) rose moderately, but not unreasonably, even ex food and energy.
The Industrial Production and Capacity Utilization report for October registered a modest gain in production and a slight gain in capacity utilization. This was a modestly positive report. Manufacturing production rose slightly. Production of business equipment declined moderately, but after rising moderately sharply in September. Production of technology equipment was quite strong. Home electronics rose very sharply. Information processing rose sharply. Computer and electronic products rose very sharply. The special category for selected high-technology industries registered a very sharp gain. Communications equipment rose sharply. Computers and office equipment rose sharply. Semiconductors and related electronic components rose very sharply. Consumer goods declined modestly, but mostly due to a very sharp decline in autos. Nondurable consumer goods production was unchanged.
The Bankruptcy Filing report for the September quarter registered a moderately sharp decline (6.12%) of personal bankruptcy filings over filings in the June quarter and a sharp decline in business bankruptcies (9.48%) for the quarter. This was a positive report. Ignore the news headlines claiming “record personal bankruptcies” since that is measured over the entire past year and doesn’t show how the trend has changed dramatically. We still have plenty of foundering businesses (and families) that need to be worked through, but we’re making good progress at getting people onto a more sound financial basis.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp decline, but its six-month smoothed growth rate rose moderately. This was a mixed, but modestly negative report, but still suggests 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, rose by 4.69% on Friday to 17.63, which is modestly above the midpoint of the low anxiety (moderate complacency) zone (15 to 20). People were moderately disappointed by the market weakness. 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 2.85% on Friday to 16.94.
The Nasdaq-100 VIX (VXN) rose by 2.79% on Friday to 26.16.
The Nasdaq-100 After Hours Indicator had a positive tone for the Friday evening session, closing up 1.46 points. People were prepared to believe that the sell-off was probably overdone.
[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 rose modestly against the yen, but fell moderately 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 sharply, and is now modestly above the $32 “anxiety” level. Most of the rise was probably short-covering in the face of heavy speculative buying. The upwards momentum is a lingering effect of the Saudi bombing, but that will probably gradually fade away. 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.
[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 11 indicated a slight decrease in the ratio of open commercial S&P 500 index futures long positions to short positions from 0.942 to 0.939, 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 slightly to their short positions. Trading of the “e-mini” S&P 500 index futures indicated a moderately sharp increase in the ratio of longs to shorts from 0.90 to 0.97 indicating that amateur traders are moderately less bearish. They added moderately to their long positions, and cut significantly more of their short positions. Trading of the Nasdaq-100 index futures indicated a modest increase in the ratio of longs to shorts from 0.71 to 0.73, indicating that “the smart money” was still quite bearish, but modestly less so. Traders added to their long positions moderately and increased their short positions by about half as much. Trading of the “mini” Nasdaq-100 index futures indicated a slight increase in the ratio of longs to shorts from 1.224 to 1.228, indicating that amateur traders were still somewhat bullish, and slightly more so. Amateur traders added to their long positions moderately and added less to their short positions. 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.
[ * ] It’s quite understandable that there might be weakness in Japanese and other Asian stocks since mutual funds focused on international stocks (particularly those of Asia) were the primary focus of the mutual fund trading abuse of so-called ‘market timing’ (more properly known as net asset value arbitrage or stale price arbitrage or time zone arbitrage). So, as investors move money from ‘bad’ funds (international) to safe funds (e.g., S&P 500 index funds), it’s only natural that Japanese stocks would take a hit.
[ * ] There was an interesting article in the New York Times on Sunday about Stanford Professor Eric Zitzwitz who researched the quantitative impact of the recently publicized mutual fund trading abuses. It’s actually not a well-written article, but does offer some tidbits that illuminate the way the case has developed. I actually met and chatted with the guy after his recent appearance before the House Financial Services Committee the week before last. He was able to clarify for me some of the arcane issues that seemed rather fuzzy. He’s not the only or the first researcher to tackle these mutual fund abuses, but his papers have been quite clear, concise, and easily digested, and came at the right time when regulators were interested in the topic.
[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.
Unless a significant catalyst for a decline appears, the market is due for a bounce. The market appears to be significantly ‘oversold’ on a short-term technical basis.
[ * ] The lead sentence for one market commentary said that “U.S. stocks could see more declines in the coming week as expectations for higher consumer prices and a lack of corporate earnings provide investors with little reason to buy after an eight-month run-up, experts said.” While it certainly is possible that we could see further declines, this rationale for the decline is not very credible. Rather, the key determinant of whether the market moves up or down over the next week or two is the pace of money flows for stock mutual funds. Traders can push the market up or down only so far (what I call ‘trading’ froth), but the underlying trend of the market comes from ‘real’ buying and selling such as comes from stock mutual funds.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -37 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 277 days (1 year and 27 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 within the next few weeks, 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 is 5 days off its 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 170 days. Nasdaq is 6 days 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 69 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.
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 16 days old and 6 days 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. This leg is still on the verge of being ‘broken’ due to the decline off of the recent 52-week closing high. It won’t be ‘recovered’ until it closes above the previous peak for at least three days and sets a new closing peak at least 1% above the old peak.
We have a potential new up-leg of the Nasdaq advance starting on Tuesday, November 11 with an intra-day low of 1,924 (approx.). Wednesday was Day 2 of the potential up-leg with a gain of 42 points, but it doesn’t matter what happens on Days 2 and 3 other than to not set a new intra-day low. Thursday was Day 3 with a loss of 6 points, but the intra-day low from Day 1 remained intact. Friday was Day 4 with a sharp decline, but the intra-day low remains intact (albeit by only 6 points). Monday is Day 5. On Days 4 through 10 we look for a gain of at least 1% on heavy volume higher than the previous day as confirmation of the up-leg.
The fact that Nasdaq is still 62 points off its recent intra-day high is a clear yellow flag and suggests that the recent run-up may now be in a near-term ‘consolidation’ mode. That does not mean that a full-blown correction is necessarily likely. In fact, we are in a short-term trading range. There may have been as much as 125 points of ‘trading froth’ at the peak, so we could see up to another 63 points of decline before a true correction might be indicated. Note that we’re still 89 points above the starting level of the most recent minor up-leg that started on October 24. The big wildcard remains mutual fund money flows – which rose by $3.5 billion in the latest week.
[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 17, 2003 12:29:13 AM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology