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(Updated since Saturday – changes marked with [ * ])
People were still content to sit on the sidelines on Friday, waiting for the dust to settle and for a meaningful level of buying interest to emerge after the recent sell-off. The market action still has far less to do with geopolitical concerns and mutual fund scandals than simply working through a technical consolidation phase after the recent run-up.
Nasdaq establish a new intra-day low for the current correction, but quickly bounced back and closed 16 points above the intra-day low.
Nasdaq volume was quite light (1.63 billion shares). Breadth was modestly positive, with 1.22 gainers for each loser. This was a slow trading session, notable only for the lack of any significant selling pressure. Trading was probably slower due to people taking off early for the Thanksgiving holiday week.
According to Thomson Financial I-Watch, institutional investors were net sellers of Microsoft (MSFT), Sun (SUNW), Lucent (LU), Cisco (CSCO), and Intel (INTC), but net buyers of Brocade (BRCD), Oracle (ORCL), JDS Uniphase (JDSU), and Applied Materials (AMAT). It was another mixed day, but there was enough buying to strongly suggest that the market is not about to dramatically fall off a cliff any time in the near future.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp rise to a new all-time high, and its six-month smoothed growth rate rose moderately but is still well off its high at the beginning of August. This was a positive report, and continues to suggest reasonably strong growth in the months ahead.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a modest rise (0.53 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended November 21st. This was a slightly negative report. Gasoline is 11.34 cents higher than the average on the same day last year. The price of crude oil is bouncing around too much to predict its influence on gasoline prices. Lundberg expects prices to rise moderately in the short term, but steeper increases are possible if OPEC decides to cut production at its December 4 meeting, or if there are “glitches” in the rollout next month of gasoline blends with the pollution-reducing additive ethanol. Actually, crude is above OPEC’s price band and has been for 10 days, so OPEC could raise production if crude doesn’t retreat sufficiently over the next 10 days. That means that it is likely that crude prices will retreat over the next two weeks.
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 1.53% on Friday to 19.89, which is modestly below the upper end of the low anxiety (moderate complacency) zone (15 to 20). People were a little relieved by the market bounce, but are still awaiting confirmation that the sell-off is really over and that the market is really ready to resume the advance. 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 2.57% on Friday to 18.98.
The Nasdaq-100 VIX (VXN) fell by 4.62% on Friday to 29.08.
The Nasdaq-100 After Hours Indicator had a positive tone for the Friday evening session, closing up 0.27 points. There is an emerging sense of cautious optimism that maybe the recent correction is over.
[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 slightly 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 remains modestly below the $32 “anxiety” 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, but is still short of the magical $400 barrier. 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.
[ * ] Check out these photos of the “excavation” of a MIG fighter in Iraq. The Iraqis went through a lot of trouble to bury the thing, so there’s a lot of speculation that they had some “sinister” motive. This is rather bizarre. Maybe their motive was to try to trick the U.S. neoconservatives into believing that there were WMDs in Iraq.
[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.
[ * ] Good News/Bad News: There was a report in The New York Times that Goldman Sachs (GS) has been thinking about spinning off its research department. That would be really good news and set a good precedent for other financial companies to help establish independent and objective research as a norm. The Bad News: First, a spokesman denied that Goldman intended to eliminate its research department. Second, and worst of all, the spokesman said that “As a premier institutional sales house, our research is critical to our franchise.” In other words, research is a tool to support institutional sales. Meaning that sales (buying and selling of stocks) is enhanced by the research. In other words, the company depends on the fact that changes in research (telling people to buy or sell) increases sales volume (more buying or more selling). That’s a clear conflict of interest: the company stands to gain financially whenever a stock analyst changes their rating on a stock. Besides, even if the research was spun off into an independent company that could sell research to others, the new company would be somewhat beholding to Goldman.
The infamous steel tariffs are going to be removed very soon. There is some talk of substituting a licensing system to enable tracking of steel imports to be able to detect sudden surges that indicate dumping. In any case, simply ignore all the chatter about trade wars. Even the textile tariffs will not amount to a trade war. Tariffs would have to be widespread and long-lasting to constitute a trade war and there is no sign of that happening. All the chatter is simply the work of the volatility crowd whose motive is to incite additional volatility of markets to enhance their own profits.
The CFTC (Commodity Futures Trading Commission) Commitments of Traders report for the week ended November 18 indicated a slight increase in the ratio of open commercial S&P 500 index futures long positions to short positions from 0.94 to 0.95, indicating that “the smart money” is slightly less bearish and have slightly decreased their betting that the S&P 500 index will decline. Traders cut their short positions modestly and added moderately to their long positions. Trading of the “e-mini” S&P 500 index futures indicated a moderate decrease in the ratio of longs to shorts from 0.97 to 0.94 indicating that amateur traders are moderately more bearish. They cut their long positions modestly, and increased their short positions moderately. Trading of the Nasdaq-100 index futures indicated a slight decrease in the ratio of longs to shorts from 0.73 to 0.72, indicating that “the smart money” was still quite bearish, and slightly more so. Traders cut their long positions modestly and increased their short positions modestly. Trading of the “mini” Nasdaq-100 index futures indicated a moderately sharp increase in the ratio of longs to shorts from 1.23 to 1.34, indicating that amateur traders were still rather bullish, and even more so. Amateur traders added to their long positions moderately sharply but added moderately to their short positions as well. The other way of reading the Nasdaq-100 mini is that the majority bulls became more bullish and the minority bears became more bearish. 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.
[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.
Trading could be somewhat subdued but volatile due to the holiday-shortened week.
[ * ] There are a bunch of economic reports due out on Tuesday and Wednesday before Thanksgiving, including the revised Q3 GDP report, so people could do some positioning in advance of the reports. Most of the data should be fairly supportive of the thesis of a gradually improving economy. That said, we could also see some significant volatility in the economic data.
My forecast for Monday is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +12 on Friday, moderately 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 282 days (1 year and 32 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 10 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 175 days. Nasdaq is 11 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 74 days old and 11 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 21 days old and 11 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 10 days old. It reached an intra-day low of 1,878.07 on Friday, November 21, a decline of 114 points or 5.73%.
We have to invalidate the potential new up-leg of the Nasdaq advance that started on Wednesday, November 19 with an intra-day low of 1,880.31 due to a new intra-day low of 1,878.07 hit on Friday, November 21. We once again wait for the start of a new minor up-leg.
We have a potential new up-leg of the Nasdaq advance starting on Friday, November 21 with an intra-day low of 1,878.07 and a bounce of 16 points off that low into the close. Monday 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 98 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 27 points of decline before a true correction might be indicated. Note that we’re still 52 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 inflows of $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 24, 2003 12:05:19 AM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology