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Despite the (unnecessarily) heightened anxiety over the bombings in Turkey, the market did okay. The moderate trading volume indicates that most people decided to simply sit out the confusion. Nasdaq opened 15 points lower and closed only 5 points lower than the open. The U-turn rally/sell-off in between was probably simply a combination of day trading and anxious short-covering followed by a re-opening of shorts once the rally petered out. The rally probably would have been sustainable, if not for the fact that so many people sat out the trading session.
The volatility crowd (traders and short-term speculators) always love to incite a little extra volatility. They know that if they build up the anxiety level high enough, then a lot of market participants will simply step back and wait for the dust to settle or even join in the fray. But, true investors are smart enough to know that this kind of incitement and volatility are very short-lived. Within a couple of days, memories of the Turkish bombings will have receded.
Nasdaq volume was barely moderate (1.77 billion shares). Breadth was moderately negative, with 1.61 losers for each gainer. This was a so-so sell-off, call it a moderate yellow flag, but by itself not a big deal.
According to Thomson Financial I-Watch, institutional investors were net sellers of HP (HPQ), JDS Uniphase (JDSU), Cisco (CSCO), Brocade (BRCD), and Nortel (NT), but net buyers of Microsoft (MSFT), Sun (SUNW), Intel (INTC), and Oracle (ORCL). It was a mixed day due to the market gyrations, with institutions sometimes buying dips and sometimes selling into rallies, but there was enough buying to indicate that the market is not about to dramatically fall off a cliff any time in the near future.
The Unemployment Insurance Weekly Claims report registered a moderate decline in initial claims – under 400K for a seventh consecutive week – and a modest rise in continuing claims. This was a positive, but slightly mixed report, but there is a lot of volatility. Unadjusted initial claims declined sharply to 340K, well below the year-ago level of 373K – and well under 400K. The 4-week moving average of initial claims declined moderately and is moderately below 400,000 for a seventh consecutive week, and moderately below the level of a year ago. Unadjusted continuing claims declined modestly and are still moderately below the level of a year ago. Adjusted continuing claims are still moderately below the level a year ago. The 4-week moving average of continuing claims declined slightly, and is moderately below the level of a year ago. Initial claims have not yet been safely enough below 400K (moving average is 367K, which is still somewhat above 350K) to challenge the implication that payroll employment may not be growing very much at all (even though overall, household employment probably continues to grow). Unemployment won’t fall significantly until the economy begins to consistently grow at a faster pace and the pace of business restructuring slows down and the pace of business formation picks up. The insured unemployment rate (2.8% or 2.4% unadjusted) is slightly better than during the same week in 1992 when the economy was recovering from the last recession (2.9% or 2.4% unadjusted). Initial claims were not consistently below 400K in 1992 until October. Initial claims are moderately lower than in the same week in 1992 (355K vs. 377K), and moderately lower than in 1992 once you strip off the dysfunctional seasonal adjustment (340K vs. 348K.) The talk about continuing claims being at or near a 20-year high is a complete red herring (true, but irrelevant) since it is the insured unemployment rate (see three sentences back) that is important and covered employment has risen by over 21% since 1992 alone. The bottom line is that although the labor market is lackluster, it’s not in too bad shape and not getting seriously worse.
The Philadelphia Fed Business Outlook Survey for November registered a modest decline in the pace of general business activity but to a pace that still indicates a relatively solid expansion. This was a modestly negative, but mixed report. According to the report, “Manufacturing executives’ outlook for growth over the next six months improved again in November, and many future indicators remain near their highest readings since 1992.” The pace of New Orders declined modestly sharply, but is still quite positive. The pace of shipments declined modestly, but is still quite positive. Unfilled orders continue to expand and at a modestly faster pace. Employment continues to expand modestly, but at a modestly slower pace. The average employee workweek contracted slightly, possibly due to overtime being cut as additional workers were hired. Six-month expectations for the level of general business activity expanded moderately, and are still very strongly positive. Expectations for both new orders and shipments expanded moderately sharply and are still strongly positive. Expectations for unfilled orders declined slightly but are still quite strong. Building an order backlog (also known as a ‘pipeline’) is a necessary step to getting to sustainable growth where manufacturers can afford to continue production even during brief slack periods. Expectations for employment declined moderately sharply, but are still quite positive. Expectations for the average workweek rose moderately sharply, indicating an intent to use more overtime. Expectations for capital expenditures rose moderately sharply and are finally reasonably positive.
The Conference Board Leading Index for October registered a moderate rise and September’s modest decline was revised up to no change. This was a positive report. The report notes that “The continued growth in the leading index suggests that strong economic growth should continue in the near term.” The Leading Index is calculated using ten indicators, six of which increased in October. The indicators making a positive contribution – in decreasing order – were average weekly initial claims for unemployment insurance (inverted), building permits, vendor performance, stock prices, index of consumer expectations, and interest rate spread. The three indicators dragging the leading index down – in decreasing order – were real money supply, manufacturers’ new orders for nondefense capital goods, and manufacturers’ new orders for consumer goods and materials. The tenth indicator, average weekly manufacturing hours, held steady in October.
After the close: AMG Data Services reported that for the week ended Wednesday, November 19, $3.5 billion flowed into equity mutual funds, with 80% to domestic funds. This was a positive report, especially coming on the heels of the recent publicity over mutual fund trading abuses. $35 million flowed out of taxable bond funds. $19.5 billion flowed into money market funds. $93 million flowed out of municipal bond funds, the 18th consecutive week of outflows. $108 million flowed into international and global debt funds, the 15th consecutive week of inflows, putting further pressure on the dollar.
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 3.86% on Thursday to 20.20, which is modestly above the lower end of the moderate anxiety (low complacency) zone (20 to 25). All of the chatter about the bombings in Turkey was certainly a factor in raising anxiety, but the failure of the market to bounce more strongly after the recent sell-off may have been an even bigger concern. VIX spiked up to 20.18 at the open, moved up to 20.84 shortly before 10:30 a.m., then fell off as the market recovered, and then rose again as the recovery bounce evaporated. 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 3.62% on Thursday to 19.48.
The Nasdaq-100 VIX (VXN) rose by 1.77% on Thursday to 30.49.
The Nasdaq-100 After Hours Indicator had a positive tone for the Thursday evening session, closing up 1.35 points. Despite the (unnecessary) anxiety over the bombings in Turkey, people feel that the decline during the day was a bit overdone and that the economic and business outlook warrants a little optimism.
[11/21/03] 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 or June. 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.
The price of oil fell moderately sharply, and is once again modestly below the $32 “anxiety” level, but partially this is due to a switch from the December futures front month to January futures. The December futures are only modestly below $33. 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. 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.
Although the terrorist bombings in Turkey were certainly disheartening, they really don’t have any significant implications for U.S. investors. Sure, traders and short-term speculators do respond to these events, but that’s a short-term effect that typically doesn’t last for long.
[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.
[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.
Now that the gains of the bounce off the recent sell-off have almost completely evaporated, people are seriously wondering whether the sell-off may be set to continue. I would point out that stock mutual fund inflows have been $3.5 billion for each of the past two weeks, so it is only a matter of time before traders and short-term speculators once again feel the upwards pressure of the rising tide of mutual fund inflows.
Traders and short-term speculators will tend to close out positions (or at least hedge them) in advance of the weekend when anything can happen.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -18 on Thursday, 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 281 days (1 year and 31 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 9 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 174 days. Nasdaq is 10 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 73 days old and 10 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 20 days old and 10 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 9 days old.
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 was Day 2, but with a decline that came within 61 cents of setting a new intra-day low for the leg, but managed to close 1.60 points above the low for the leg. It doesn’t matter what happens on Days 2 and 3 other than to not set a new intra-day low. Friday is Day 3. 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 110 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 15 points of decline before a true correction might be indicated. Note that we’re still 40 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 were $3.5 billion in each of the past two weeks.
[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 21, 2003 12:05:19 AM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology