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There were a number of reasons postulated for the market decline on Monday, but the most likely reason is that traders managed to build up enough negative sentiment to trigger a cascade of ‘stop’ orders. I don’t buy “geopolitical concerns”, “valuations”, etc. as reasons for the decline. The “volatility crowd” likes to harp on any and all “concerns” to incite selling pressure. It is certainly possible that there may have been some negative pressure from mutual fund redemptions, but that’s idle speculation. The good news is that Nasdaq managed to close well above the intra-day low, recovering almost half of the intra-day losses. That’s a positive sign.
The mere fact that Nasdaq performed so poorly in the face of solid economic reports strongly suggests that traders and ‘technical factors’ were at work rather than economics or business fundamentals. Momentum speculators from the recent run-up probably had a lot of tight stop orders to protect themselves from further loss of profits. Traders know that and love to build up a head of negative sentiment to trigger those stops and cause a cascade of further selling.
Nasdaq reached its closing level shortly after 10:00 a.m. The intra-day low was reached about 1:30 p.m. Nasdaq spent the rest of the day recovering half of the earlier losses.
The first half of the day was a classic “throw in the towel” sell-off, and the second half was a classic “buy the dip” rally.
Nasdaq volume was moderate (1.84 billion shares). Breadth was very negative, with 2.22 losers for each gainer. This was a lackluster sell-off due to the weak volume and moderate point decline. Still, the sharply negative breadth warrants a yellow flag.
According to Thomson Financial I-Watch, institutional investors were net buyers of Sun (SUNW), Microsoft (MSFT), Cisco (CSCO), JDS Uniphase (JDSU), Oracle (ORCL), Intel (INTC), Nortel (NT), EMC (EMC), and AT&T Wireless (AWE). Institutions were clearly buying the dip (all day long), strongly suggesting that the market is not about to dramatically fall off a cliff any time in the near future. This was another positive sign.
The New York Fed Empire State Manufacturing Survey for November registered a moderately sharp rise in the General Business Conditions index (now positive for seven consecutive months) to another record level and still indicating strongly positive conditions. This was a very positive report. The NY Fed said that “conditions for New York manufacturers improved substantially.” The new orders and shipments indexes “topped the previous records set in October.” Unfilled orders continue to rise, but at a much slower pace. Employment continues to expand, but at a modestly slower pace. The average employee workweek continues to expand and at a modestly faster pace. Even better, employment and the average workweek were simultaneously positive for a second consecutive month. The six-month expectations indicated an even greater degree of optimism. Expectations for general business conditions rose modestly. Expectations for new orders are still quite high, but modestly below last month. Expectations for shipments rose modestly. Expectations for unfilled orders are still reasonably positive, but significantly less than last month. Expectations for employment are moderately higher. Expectations for average employee workweek are very modestly higher. Expectations for capital expenditures continue to improve, rising to “its highest level in more than a year” and moderately sharply higher than last month.
The Manufacturing and Trade Inventories and Sales report for September registered a moderate rise in sales (of distributive trade and manufacturers’ shipments, and now including semiconductors), a modest rise in inventories, and a moderate decline in the inventories/sales ratio. This was a positive report. Rising business inventory levels during a recovery are a very bullish sign for the future prospects for the economy.
The Wal-Mart (WMT) Weekly Retail Sales Update indicated that sales are on track to meet its November forecast of 3-5% growth. This was a positive report. The strongest product categories were pharmaceutical goods, household paper goods, and food.
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 6.75% on Monday to 18.82, which is in the upper half of the low anxiety (moderate complacency) zone (15 to 20). People are somewhat concerned that the market showed such weakness and did not stage a dramatic bounce for the day. VIX jumped up to 18.44 at the open, trended upwards most of the day to a peak of 20.27 around 2:30 p.m., and then fell off somewhat 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 9.80% on Monday to 18.60.
The Nasdaq-100 VIX (VXN) rose by 6.31% on Monday to 27.81.
The Nasdaq-100 After Hours Indicator had a mixed tone for the Monday evening session, closing down 2.65 points. People were a bit dispirited that the market didn’t bounce on Monday. There was a little hopeful optimism during the first part of after-hours trading, but it petered out and turned negative. People are terribly confused about what to expect next.
[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 moderately sharply against the yen and rose slightly 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 very sharply, and is now modestly below the $32 “anxiety” level. This was primarily a bout of profit-taking after speculators recently pushed oil up way too far. 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 very sharply. Traders made a run at $400, but fell short by a dime, most likely due to a minefield of ‘sell’ orders that are probably clustered around the $400 level. That minefield must be cleared (by more money flowing into the gold market) before $400 can be breached in a sustainable manner. There is no economic significance to the $400 level. It’s merely a psychological goal for mindless speculators. 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.
The recent attacks in the Middle East are of course rather depressing, but otherwise have no significance for investors here in the U.S. Attacks against U.S. interests (and U.S. allies) in shaky countries are likely to continue, but that in no way indicates that attacks in the U.S. and other relatively secure countries are in any way more likely. Despite chattering to the contrary, Saudi oil is not in any way threatened by recent attacks.
[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.
It was good to hear that the U.S. has dramatically stepped up counterattacks against the insurgents in Iraq. The big question is whether the U.S. keeps up the pressure continuously, 24 by 7, for an extended period of time, until the insurgents are all dead. The one thing that we know doesn’t work is a one-shot, heavy-duty response intended to “send a message” followed by a period of only light response. These people do not get messages from us. The message they have been getting is that if we haul out the big guns, all they have to do is hunker down and wait us out and then resume their insurgency attacks after we back off.
[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 read some market commentary that said that “Geopolitical concerns make a comeback.” It’s a nonsensical statement from an investment perspective. What it does mean is that the volatility crowd (traders and short-term speculators and cynics) is once again trying to incite volatility by touting negative news in hopes that it ‘sticks’. These guys will try anything. The overall market trend will continue to be driven by expectations for the economy, corporate revenues, and corporate earnings, plus the actuality of stock mutual fund money flows. Geopolitical concerns are at best merely part of the ‘trading froth’ that sits atop the underlying market. Good news means more froth, bad news means less froth, but the rise or fall of underlying economic and financial expectations is what determines the overall market direction.
I read a headline saying that “Calpers votes to terminate Putnam contracts.” Sure, Calpers is the biggest U.S. pension fund, but their business with Putnam that is being terminated amounts to a mere $1.2 billion. The story didn’t say whether Calpers has remaining contracts with Putnam. The story also didn’t say what Calpers was planning on doing with that $1.2 billion.
[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.
Although additional profit-taking is certainly possible, the market is quite overdue for a significant bounce.
The Consumer Price Index (CPI) is due out today and will be of interest primarily to the bond market, but it is unlikely to move the market unless wildly off from expectations. That said, any market movement may well get credited to the CPI release.
The weekly chain store sales report will be of interest, but unlikely to move the market. Ditto for the National Association of Home Builders (NAHB) Housing Market Index (HMI).
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -21 on Monday, 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 278 days (1 year and 28 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 6 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 171 days. Nasdaq is 7 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 70 days old and 7 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 17 days old and 7 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 to invalidate the potential new up-leg of the Nasdaq advance that started on Tuesday, November 11 with an intra-day low of 1,924 (approx.) due to setting a new intra-day low of 1,890.72. We now look for the start of another new potential up-leg.
We have a potential new up-leg of the Nasdaq advance starting on Monday, November 17 with an intra-day low of 1,890.72 and a close 19 points above that low. Tuesday will be Day 2, but it doesn’t matter what happens on Days 2 and 3 other than to not set a new intra-day low. 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 83 points off its recent 52-week 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 42 points of decline before a true correction might be indicated. Note that we’re still 68 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 11:53:53 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology