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Finally, we got a long-overdue bounce on Wednesday. It wasn’t a very strong bounce, but at least Nasdaq opened higher and closed even higher. The question is whether it was simply a classic dead-cat bounce, a relief rally, or whether it signals the end of the sell-off. We’ll just have to give the market a week to see which way the dust settles. There was probably almost certainly a fair amount of short-covering behind the rise, but I suspect that there are probably still a fair number of shorts who are not about to throw in the towel until they can see (and feel in their wallets) a stronger bounce.
The cause of the rally was quite simple: selling exhaustion, which means that everybody who could have sold had already done so. That causes traders to reverse and bet on the upside, triggering a cascade of short-covering.
Nasdaq opened with a little optimism, rose a little further, dived back into negative territory (slightly), recovered a little, and then meandered upwards for the rest of the day. That’s a good sign, with a test of the previous low followed by a recovery. Nasdaq did close a few points off its intra-day high, but not by enough to invalidate the modest rally.
Nasdaq volume was moderate (1.80 billion shares). Breadth was moderately positive, with 1.42 gainers for each loser. This was a so-so rally, not terribly impressive. It illustrates the fact that people are not quite ready to believe that the sell-off is really over. But, that’s par for the course after a correction.
According to Thomson Financial I-Watch, institutional investors were net sellers of Microsoft (MSFT), Oracle (ORCL), Cisco (CSCO), Intel (INTC), and JDS Uniphase (JDSU), but net buyers of Sun (SUNW), HP (HPQ), Sprint PCS (PCS), and Motorola (MOT). It was a mixed day, with some selling into the rally by institutions, but they tend to do that after buying into recent dips.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a moderate rise in applications, with a sharp rise in applications to purchase outweighing a modest decline in refinancing. This was a positive, but mixed report, but there does tend to be a lot of volatility. Nonetheless, demand for buying homes is still quite strong.
The New Residential Construction report for September registered a sharp rise in building permits, a moderately sharp rise in housing starts, and a modest rise in housing completions. This was a positive report. Housing demand continues to be quite strong and continues to baffle and befuddle the economists.
After the close: The SEMI Chip Equipment Sales report for October registered a sharp rise in billings (shipments), a sharper rise in bookings (orders), and a moderate rise in the book-to-bill ratio (to 1.00 from 0.96 – which was revised up from 0.95). This was a positive report. Note that this data is based on three-month moving averages. The sharp rise in bookings is a very buoyant sign for the future. This is the first time in 14 months that the book-to-bill ratio has not indicated contraction. The report noted that “The October data is a welcome confirmation of improving industry conditions. While the industry must still contend with a challenging economic environment, there is increasing evidence that a recovery is mounting for the semiconductor equipment market.” Please note that this report covers companies that produce chip equipment (such as Applied Materials (AMAT)), not companies that produce the chips themselves (such as Intel (INTC)). Also, the report covers only North American-based manufacturers.
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 2.26% on Wednesday to 19.45, which is modestly below the upper end of the low anxiety (moderate complacency) zone (15 to 20). People were modestly relieved to see the market bounce, but they weren’t terribly impressed by the mediocre strength of the bounce. 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 fell by 1.62% on Wednesday to 18.80.
The Nasdaq-100 VIX (VXN) rose by 1.05% on Wednesday to 29.96. People were really disappointed that Nasdaq didn’t bounce more strongly. They’re even more worried that Nasdaq remains vulnerable to more selling.
The Nasdaq-100 After Hours Indicator had a mixed tone for the Wednesday evening session, closing up 0.66 points. People are being very cautious about betting too much on this market after the recent sell-off. That may be a positive contrarian bullish indication.
[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.
Contrary to a lot of the chatter, there is no “looming crisis for the dollar.” Sure, there is a fair amount of “uncertainty” out there, but most of that is simply idle speculation by the volatility crowd whose sole goal is to incite higher volatility so that there are more dramatic swings for them to profit from. The current account deficit is not something that has to be “fixed” overnight or even within the next couple of years. It is something that will evolve as the economy evolves. Traders and speculators chatter as if the health of the U.S. economy was very questionable. That’s total nonsense. It’s another example of the volatility crowd in action. It’s a free country and a free market, so traders and speculators can pursue their “art and craft”, but true investors should ignore all that chatter as the useless chatter that it is.
The dollar rose sharply 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.
The price of oil fell sharply, but remains moderately above the $32 “anxiety” level. The latest inventory report shows that more crude is sloshing around than the recent chatter by traders and speculators had suggested. 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 moderately sharply. The magical $400 mark was finally crested, but only briefly and only overnight in non-U.S. markets. 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, November 19, the Pentagon reports that 10,549 more reservists are on active duty, for a total of 164,732. This was sharp increase, the first since the peak at the beginning of May. All of the increase was due to a recent call-up for the Army. The Air Force, Navy, and Marines showed decreases in the number of reservists on active duty. The headcount has declined by 59,796 or 27% 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.
I have mixed feelings about Schwab (SCH) buying Soundview (SNDV). I’m certainly in favor of consolidation, but this union does not advance the concept of independent research that is neutrally objective. Schwab likes to claim that they don’t have conflicts of interest and that they offer independent research, but the simple fact is that they profit from transactions that are driven by changes in research recommendations. They say that they’re not afraid to give you a “sell” recommendation, but that’s because they profit from execution your sell order. SoundView does not offer independent research. They themselves bill themselves as a “research-driven securities firm” – that’s from the Schwab press release. They are first and foremost a securities firm, meaning that they profit from execution of transactions. They are also a market maker for many of the stocks that they cover, which means that they profit from transactions in those stocks. The phrase “research-driven” tells it all – they use research as a tool to drive the other parts of their business that derive profits from the use of that tool. The Schwab press release notes that “SoundView produces comprehensive sell-side equity research on approximately 210 companies.” That phrase, “sell-side”, tells it all – “sell-side” is the bad kind of research, the kind that was traditionally promoted by investment banks, but continues to be oriented towards promoting transactions rather than focusing on neutral objectivity. Investors should seek out “buy-side” research, which is neutrally objective and doesn’t seek to encourage transactions. The motivation for this transaction appears to be “institutional trading business”, using research to “support” the trading requirements of institutional investors. This is not a transaction that favors retail investors. As the press release itself puts it, Schwab Capital Markets L.P. will “provide institutional clients with a deep, differentiated fundamental equity research offering -- built on both firms' histories of delivering influential research -- combined with its client-focused trade execution capabilities.” In other words, the focus is on research for institutional clients plus this “client-focused trade execution.” They do also say that “Separately it expects also to identify opportunities with individual investor clients”, but that appeared to be merely tacked on as if it were clearly a secondary afterthought. They make no mention of why it’s so important to have research tied to “trade execution.” Even if Schwab does disclose to retail investors that they have a vested interest in trading, that disclosure doesn’t make the research any more objective or independent. It is also worth noting that SoundView also has a venture capital “arm” that has invested in a bunch of promising technology start-ups that will be IPOing over the next few years. There will be no way that Schwab could be expected to give neutrally objective recommendations for those companies. The conflict is even worse than for an investment bank since Schwab/SoundView will have huge amounts of capital gains at stake rather than the relatively minor fees that an investment bank typically collects. And finally, SoundView is also an investment bank for the technology sector. So, in fact, Schwab’s biggest claim to “objectivity” – that they have no conflict since they don’t do any investment banking – is going to vanish with the stroke of a pen. Just to illustrate how bad the conflict is, the very first bullet point on SoundView’s Investment Banking web page states that their “bankers leverage their insights” using “Proprietary research from our independent analysts with unparalleled industry insight.” They go on by touting that their success at investment banking has been led by “the unique combination of our client and research-driven orientation.” The bottom line is that this “research” is not independent and neutrally objective, but is intended to drive the trade execution side of the business, not to mention the potential interaction with investment banking and venture capital. There ought to be a law against this kind of thing, but we live in an imperfect world. Click here to read the official press release.
I read a story that referred to “market timing, which is rapid-fire trading to profit from pricing lags, such as those that may occur across time zones.” It’s bad enough that people have been improperly using the term market timing to refer to arbitrage (specifically, stale-price arbitrage), but to suggest that this arbitrage involves “rapid-fire trading” is absurd and simply incorrect. It’s a once a day event for any given fund based either on the fact that the market for the underlying securities is closed or the securities are too illiquid for their “last trade” price to keep up with the bid/ask spread. So, if you do execute one of these so-called “market timing trades”, a day or more is likely to elapse before another might be likely for that fund since you would have to wait for a new lagged price to appear. The only possible excuse for the improper use of terminology might be based on the idea that in theory, mutual fund investors shouldn’t be trading at all, so trading once a day or once a week or once a month is too “rapid” for mutual fund investment. Most likely, editors prefer the more dramatic “rapid-fire trading” wording to the more prosaic “trading”.
The very next paragraph of the previously mentioned story goes on to refer to “late trading, or buying mutual funds at stale prices.” Admittedly the term “stale price” is somewhat generic and both market timing and late trading do depend on non-real-time or “stale” prices, but the usage “buying mutual funds at stale prices” would imply that late trading is also market timing and that the two terms are synonymous. That is not the case. Late trading arises when news comes out after the market closes and the investor (but not retail investor) is permitted to place an order for fund shares using the closing price. Normally, all orders (and certainly all orders from retail investors) are entered using what is called forward pricing, meaning that your order will be executed using the price at the next close. If you put your order in at 3:59 p.m. then you get the 4:00 p.m. price, but if you put your order in at 4:01 p.m. you are supposed to get the 4:00 p.m. price of the next trading session. Hedge funds and other preferred investors (but not retail investors) were allowed to enter orders after news came out after the close in exchange for offering the mutual fund management company or its managers some form of compensation. In some cases, management company executives cheated and entered orders at the previous closing price. In any case, the phrase “buying mutual funds at stale prices” does not define and distinguish late trading from market timing. Please note that market timing was primarily focused on international funds (because the markets were closed while the 4:00 p.m. local closing price was still available). Market timing is alleged to have cost some fund shareholder 1.1% a year, but late trading is alleged to have cost only 0.1% a year. Late trading was certainly an inappropriate practice and should be remedied, but the net loss to fund shareholders was very minimal at worst. To my knowledge, there have not been any cases of either market timing or late trading with passive index funds.
I was reading some commentary by Standard & Poor’s on Union Pacific (UNP) and they say that “Standard & Poor’s generally views dividend payments as negatives for bondholders.” It does make sense, and certainly emphasizes that stockholders and debt holders have different interests and management has to continually balance those competing interests. That also illustrates the desirability of investing in companies with minimal debt. Still, it does seem odd that S&P would view something as good as dividends as a negative.
[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 it is certainly possible that we could see a continuation of the sell-off, we could also see a continuation of the relief bounce. Basically, today we will find out if the rally on Wednesday was real and the start of the next leg upwards or a dead-cat bounce before the correction continues downwards.
The weekly jobless claims report will provide another few clues about the economy. It could go either way due to volatility and seasonality, but the overall trend should remain downwards, at least once the dysfunctional seasonal adjustment is removed.
The big wildcard for the market remains the pace of money flows for stock mutual funds. The indeterminate shuffling and withdrawal of money due to the unfolding scandals just muddies the flows even more. Even in the best of times, money flows are not consistent enough to keep the market moving up (or down) smoothly. We get the latest weekly money flows from AMG Data Services on Thursday evenings.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +18 on Wednesday, well above 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 280 days (1 year and 30 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 8 days off its 52-week intra-day high of 1,992.27 on November 7.
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 173 days. Nasdaq is 9 days off its closing peak of 1,976.37 on November 6 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 72 days old and 9 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 19 days old and 9 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 clearly ‘broken’, but not completely dead. 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.
The correction off the intra-day high of 1,992.27 on November 7 is now 8 days old.
We have to invalidate the potential new up-leg of the Nasdaq advance that started on Tuesday, November 18 with an intra-day low of 1,881.75 due to setting a new intra-day low of 1,880.31 on Wednesday. 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 Wednesday, November 19 with an intra-day low of 1,880.31 and a bounce of 19 points off that low into the close. Thursday 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 93 points off its recent 52-week intra-day high is a very clear yellow flag and suggests that the recent run-up is now in a near-term ‘consolidation’ mode. That does not mean that a full-blown correction is necessarily likely. We are probably 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 32 points of decline before a true correction might be indicated. Note that we’re still 58 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 19, 2003 11:32:23 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology