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Tuesday was simply a day of modest technical consolidation after the big rally on Monday. There was some economic data, but the rally on Monday had anticipated the data on Tuesday.
It was interesting to see how Nasdaq fell 11 points very sharply in the last half hour of trading, but that was most likely just a side effect of momentum traders thinking they were on a roll a little earlier and then bailing out when the meager rally petered out and traders bet on the downside and speculators continued to sell into any rally.
Nasdaq volume was moderate (1.85 billion shares). Breadth was moderately positive, with 1.44 gainers for each loser. The modest point decline on moderate volume but with positive breadth suggests modest profit-taking on large-cap stocks and rotation into smaller-cap stocks.
According to Thomson Financial I-Watch, institutional investors were net sellers of Intel (INTC), Cisco (CSCO), JDS Uniphase (JDSU), Sun (SUNW), HP (HPQ), Brocade (BRCD), Microsoft (MSFT), and EMC (EMC), but net buyers of Oracle (ORCL). Institutions were selling into the modest rallies, but they tend to do that, so there is no reason to expect that the market might dramatically fall off a cliff any time in the near future.
The preliminary (first revision) estimate Gross Domestic Product (GDP) report for Q3 registered a sharply higher than expected gain in real GDP growth, 8.2% compared to the advance estimate of 7.2%. This was a very positive report, but it’s ancient history and gives us little guidance about the economy in the coming months (or even in the past three months). I wouldn’t get too excited about the 8%+ growth rate since a lot of it was due to the one-time effects of short-term fiscal stimulus. I wouldn’t get too excited about Q4 either. What really will matter will be the pace of growth throughout 2004.
The Existing Home Sales report for October registered a sharp decline. This was a negative report, but there is a lot of volatility and the last report was a record high and this report is still above the July level. The issue here is that we have no idea how existing home sales will trend over the coming months.
The Conference Board Consumer Confidence report for November registered a sharp gain, with a very sharp gain in the Expectations index and a sharp gain in the Present Situation index. This was a very positive report. The report notes that “Consumer confidence is now at its highest level since the Fall of 2002. The improvement in the Present Situation Index, especially in the jobs component, suggests that consumers believe a slow but sure labor market turnaround is underway. The rise in expectations is a signal that consumers will end this year much more upbeat than when the year began.” Please note that there is no clear and indisputable link between consumer confidence reports and future consumer spending.
The BTM/UBSW Weekly Chain Store Sales Snapshot registered a moderate gain (0.4%) compared to the prior week. This was a positive report, but there is a lot of volatility, especially shortly in advance of the start of the holiday shopping season. Sales were up a strong 5.6% over a year ago. BTM is still forecasting 4% growth in November compared to a year ago.
The weekly Reuters Instinet Redbook Sales Average report registered a sharp decline in chain store sales (2.9%) for the first three weeks of November compared to the corresponding weeks of October, but registered a relatively sharp gain (4.1%) for the week ended November 22 compared to a year ago. This was a mixed report. The report notes that “Sales of food products increased leading up to the Thanksgiving holiday, but discount stores slashed prices on electronics, hoping to lure early gift shoppers” and “price discounting was rampant.” This suggests a continuation of “deflation” in the retail sector, with volume rising, but net dollar sales struggling due to weak pricing power.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a sharp gain to -13 from -17 (out of a range from -100 to +100). This was a very positive report, possibly breaking us out of the narrow, flat range we’ve been stuck in for months. There was a 3% improvement in the consumer view of the overall economy, a 2% improvement in how consumers feel about their own finances, and a 2% improvement in how consumers view the buying climate. Consumer confidence may be rising due to some of the economic reports such as GDP as well as some improvement in the job market. Please note that there is no clear and indisputable link between consumer confidence reports and future consumer spending.
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 5.01% on Tuesday to 16.29, which is well below the midpoint of the low anxiety (moderate complacency) zone (15 to 20). People were quite relieved that there was little slippage in the Market from Monday’s big market gains. 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 4.19% on Tuesday to 16.71. This is the second day that new VIX closed above old VIX. I suspect that more people are switching from the S&P 100 OEX options that old VIX uses to the broader S&P 500 SPX options that new VIX uses.
The Nasdaq-100 VIX (VXN) fell by 3.99% on Tuesday to 25.99.
The Nasdaq-100 After Hours Indicator had a positive tone for the Tuesday evening session, closing up 2.05 points. Other than a good quarterly report from Tech Data (TECD), there was no particular news to boost sentiment, so most likely people were gaining optimism from the fact that Nasdaq retained so much of Monday’s gains.
[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 slightly against the yen but fell moderately 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 rose slightly, but remains modestly below the $30 “comfort” 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 fell modestly. 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.
Autodesk (ADSK) will be cutting 550 to 650 employees and closing some facilities. This is further evidence that business restructuring continues to be a drag on the economy, at least in the near-term. Longer-term, a leaner Autodesk will be a more productive contributor to the economy. Short-term, a leaner Autodesk may be a more attractive investment as investors anticipate the future reduction in operating costs.
[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.
Additional profit-taking is possible, but not a given.
There will be a bunch of economic reports today that could move the market, but a lot of them are probably already “baked into the cake.”
Being the day before Thanksgiving, trading volume could be rather light and volatile. A lot of market participants will probably leave early if not gone already.
Some people will treat today as if it were a Friday in front of a long weekend and close out (or hedge) short-term positions ahead of the weekend when anything could happen.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -4 on Tuesday, moderately 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 284 days (1 year and 34 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 12 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 177 days. Nasdaq is 13 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 76 days old and 13 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 23 days old and 13 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 12 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 was Day 3 with a modest decline, but that’s okay since a new intra-day low was not set. Wednesday is Day 4. 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 49 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 76 points of decline before a true correction might be indicated. Note that we’re still 101 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.
People in the bond market are still fighting a big battle over whether the economy is going to swoon after the effects of the fiscal stimulus peter out or whether inflation is going to take off. Mostly likely, both camps of extremists are wrong and the economy will continue to gradually improve without fostering a significant acceleration of inflation. Some people look at the steep yield curve and say that it reflects an expectation of growing inflation, but in reality it simply reflects the balance of supply and demand for bonds and the fact that people are beginning to shift money from bonds to stocks to get gains significantly in excess of the yields that bonds offer. Expect the yield curve to get even steeper in the coming months.
[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 08:12:25 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology