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Monday’s strong rally was almost entirely technical in nature, with a fair amount of short-covering, and possibly some mutual fund in-flows fueling or boosting the rally. There was no truly dramatic news on the economic, business, or geopolitical fronts to drive the rally. Traders probably noticed way too many people leaning towards the downside even after a two-week sell-off, so a little extra upwards pressure was all it took to pull the rug out from under the shorts and kick off a cascade of short-covering and momentum buying. There were probably a fair number of anxious shorts who had fairly tight ‘stop’ orders in place to protect their profits if the market moved up, and that added buying just fed on itself. Still, such a strong rally is not atypical after a protracted sell-off and does not mean that buying will continue at anything like this pace for an extended period of time.
The rally had nothing to do with the “rebounding dollar”, or falling gold and oil prices, for that matter. That may have been the chatter among traders trying to incite a rally in the pre-market, but that doesn’t make it true. The true catalyst was simply the fact that the market was deeply oversold on a short-term technical basis.
Nasdaq is now only 45 points below the recent 52-week intra-day high and 53 points below the magical 2,000 level.
Nasdaq volume was moderate (1.80 billion shares). Breadth was strongly positive, with 2.50 gainers for each loser. This was a reasonably strong rally, except the volume was not very strong.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Microsoft (MSFT), Intel (INTC), Cisco (CSCO), Brocade (BRCD), JDS Uniphase (JDSU), and Oracle (ORCL), but net buyers of EMC (EMC) and Nortel (NT). Institutions were heavily selling into the rally, but that’s what they typically do after buying on recent dips, so there is no reason to expect that the market may dramatically fall off a cliff any time in the near future.
The Wal-Mart (WMT) Weekly Retail Sales Update indicated that sales are on track to meet its November forecast of 3-5% sales growth for stores open at least a year. This was a positive report. The strongest product categories were food, pharmaceuticals, paint, and automotive gear.
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 13.78% on Monday to 17.15, which is modestly below the midpoint of the low anxiety (moderate complacency) zone (15 to 20). People were very relieved to see the market finally bounce so strongly after all the recent weakness. Still, 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 8.11% on Monday to 17.44. This was the first day that the new VIX closed higher than the old VIX. People are still acclimating to the new VIX. The fact that the new VIX is higher may simply mean the more people have moved from the old to the new, resulting in greater demand for S&P 500 index options, which results in a higher premium or higher implied volatility, which is what VIX measures.
The Nasdaq-100 VIX (VXN) fell by 6.91% on Monday to 27.07.
The Nasdaq-100 After Hours Indicator had a positive tone for the Monday evening session, closing up 4.89 points. There was some optimistic news from Novellus (NVLS), but mostly people were simply adopting a stronger stance that the big rally may in fact be the start of a new up-leg.
[11/21/03] The fed funds futures market suggests that the Fed will leave the fed funds target rate unchanged for the rest of the year, but possibly raise the fed funds target rate 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 rose moderately sharply against the yen and rose very sharply against the euro. Mostly this was profit-taking after the recent run-down of the dollar. 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 once again modestly below the $30 “comfort” level. Surprise, surprise, speculators suddenly “discovered” that oil producers have been cheating on their OPEC quotas. Guess what: producers have always cheated. Everybody knows that, but speculators were pretending they didn’t, simply to con naïve traders into going along for the ride. This move simply reemphasizes that the price of oil bounces around based on speculation rather than based on fundamentals and true supply and demand. Basically, speculators grossly bet wrongly that recent tensions would crimp supplies. 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 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.
Sprint (FON) will be cutting 2,000 jobs this quarter as part of cutting costs by 5-7% over the next three years. This further illustrates how the restructuring of businesses continues to grind on and will continue to be a near-term drag on the economy (as far as business spending and employment growth). But in the longer-run, all of this is good for the health of the economy. Sprint will become a more competitive company and all those workers will be freed to become employed by new and novel businesses that will be in greater demand than the old, bloated Sprint. To some extent, Sprint’s moves are driven by MCI working its way towards emerging from bankruptcy as a fairly lean, low-debt competitor.
I attended a presentation at the Heritage Foundation here in Washington, D.C. by Douglas Feith, who is Under Secretary of Defense for Policy at the Pentagon. He was in the news recently with regards to a classified memo to Congress on intelligence linking Iraq and al Qaeda. He gave a broad overview of the concepts and principles that have been guiding the administration’s defense policies. Feith is one of the core neocons (neo-conservatives). He even gleefully admits it, dating himself back to 1977 when as a “junior neocon” he was battling the traditional “paleocons” (his term). He rattled through quite a few concepts that gained credence beginning with the Reagan administration and constitute the bedrock that guides his work: peace through strength, the power of ideas, ideas as weapons, war of ideas, the noble fight against tyranny, philosophical warfare, infrastructure for democracy, courage and optimism, advocacy of democracy, rule of law, creating a global anti-terrorism environment, necessity for punishing terrorism, political hope, asymmetric warfare, creating conditions for freedom, etc. He also talked a little about Iraq, including its importance as a model for other countries in the region and the need for an aggressive strategy for security. In the Q&A period he also talked about the post-war planning for Iraq being “general guidelines” rather than a detailed plan. He talked about the futility of predicting the future, the need to “plan to be surprised”, and the fact that everything depends on events on the ground. It’s a shame the rest of the administration is not as articulate. Ultimately, the chasm between the neocons and the Democrats (and “Old Europe”) is that the neocons are perfectly willing to leave behind any of the “old” international institutions and allies that don’t readily assist the neocon vision, but all the non-neocons insist that consensus be developed between traditional allies and within the traditional international institutions. The big wildcard here is the evolving will of the American people in a post-9-11 world.
[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.
After the big rally on Monday, it would not be unusual to see some profit-taking, especially since the trading volume was not very heavy.
Trading volume could continue to be somewhat sluggish and volatile as we wind down into Thanksgiving.
The first revision to Q3 GDP comes out today. It’s rather difficult to say which way it will go. It may move the market if it is significantly higher or lower, but mostly Q3 is already “baked in the cake” and people are focused on Q4 and Q1. There are a number of other economic reports due out that could have a bigger effect on the market, except that the big rally on Monday may have any good numbers “baked into the cake” as well.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +53 on Monday, modestly above the high 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 283 days (1 year and 33 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 11 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 176 days. Nasdaq is 12 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 75 days old and 12 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 22 days old and 12 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 11 days old. It reached an intra-day low of 1,878.07 on Friday, November 21, a decline of 114 points or 5.73%. It may be over, but we won’t know for sure until we either confirm a new up-leg or run up above the previous intra-day high.
We have a potential new up-leg of the Nasdaq advance that started 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 was Day 2 with a fairly strong rally (53 points, but only moderate volume), but it doesn’t matter what happens on Days 2 and 3 other than to not set a new intra-day low. Tuesday 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 45 points off its recent 52-week intra-day high is a moderate yellow flag and suggests that Nasdaq still hasn’t broken out of its near-term ‘consolidation’ phase. That does not mean that a full-blown correction is necessarily likely. We may still be 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 80 points of decline before a true correction might be indicated. Note that we’re still 106 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 25, 2003 12:25:27 AM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology