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(Updated since Thursday – changes marked with [ * ])
Wednesday was a typical pre-holiday trading day, with a moderate gain for Nasdaq, but on light volume. The economic data was mixed but mostly positive, but probably had little influence on the market. People were still waiting for the dust to settle after the recent gains.
Wednesday was also a classic example of traders feverishly pushing up the market in pre-market trading, resulting in an exhaustion of buying shortly after the open, which in turn caused traders to reverse and try to push the market down. By 11:40 a.m. traders had extracted a 30-point decline from the 9:40 a.m. intra-day peak, but having reached the point of selling-exhaustion, traders once again reversed and a little real buying caused the market to trend up for the rest of the day.
Nasdaq volume was rather light (1.52 billion shares). Breadth was moderately positive, with 1.36 gainers for each loser. This was not a strong rally, but still was better than a loss.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), JDS Uniphase (JDSU), Cisco (CSCO), Intel (INTC), Applied Materials (AMAT), HP (HPQ), Nortel (NT), and EMC (EMC), but net buyers of Microsoft (MSFT). Institutions were selling into the rally, but they frequently do so after buying recent dips, so there is no reason to worry that the market might 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 an eighth consecutive week – and a moderate decline in continuing claims. This was a positive, but mixed report, but there is a lot of volatility. Unadjusted initial claims rose very sharply to 395K, but were still well below the year-ago level of 437K – and still modestly under 400K. The 4-week moving average of initial claims declined moderately and is well below 400,000 for an eighth consecutive week, and well below the level of a year ago. Unadjusted continuing claims rose sharply but 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 modestly, and is moderately below the level of a year ago. Initial claims have not yet been safely enough below 400K (moving average is 359K, 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 (2.7% or 2.5% unadjusted) is slightly better than during the same week in 1992 when the economy was recovering from the last recession (2.8% or 2.6% unadjusted). Initial claims were not consistently below 400K in 1992 until October. Initial claims are modestly lower than in the same week in 1992 (351K vs. 357K), and moderately lower than in 1992 once you strip off the dysfunctional seasonal adjustment (395K vs. 407K.) 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 Durable Goods report for October registered a moderate rise in shipments, a sharp rise in new orders, a moderately sharp rise in unfilled orders, and a modest rise in inventories. This was a positive report. The rise in unfilled orders is a healthy sign for the future. Shipments for nondefense capital goods rose modestly, and moderately sharply ex aircraft. New orders for nondefense capital goods rose moderately sharply, even ex aircraft – which is a good proxy for business capital spending. Shipments for computers and related products rose sharply, new orders declined modestly, and unfilled orders declined moderately sharply. New orders for communications equipment rose very sharply. Shipments for semiconductors were up very sharply, but down modestly ex the seasonal adjustment. Please note that there tends to be a lot of monthly volatility for orders and shipments, primarily since few customers buy durable goods on a nice, smooth monthly cycle.
The Chicago PMI report for November registered a sharp gain in the Business Barometer for manufacturing in the Chicago area, to its highest level since October 1994. This was a positive report. It does appear that manufacturing is finally gaining some traction, but there is still some lingering tentativeness. Production continues to expand and at a moderately faster pace. New Orders continued to expand, and at a sharply faster pace. Order Backlogs expanded again, and sharply, after contracting last month. The one real downside is that employment is contracting again.
The New Home Sales report for October registered a sharp decline. This was a negative report, but still above the level in May. Housing demand continues to be strong and continues to confound and befuddle even the best of economists.
The final (revised) University of Michigan Consumer Sentiment Survey for November registered a moderate gain from the final October reading. This was a positive report. The present conditions index rose moderately, and the expectations index rose moderately sharply. Please note that there is no clear and indisputable link between consumer confidence reports and future consumer spending.
The Personal Income and Spending report for October registered a moderate rise in personal income and a very slight decline (down by $1.1 billion or less than 0.1%) in personal spending (expenditures or PCE – Personal Consumption Expenditures). This was a mixed report. It’s certainly not good news that spending was flat, but there is some volatility and the summer was so strong. The decline in PCE was primarily due to lower spending on motor vehicles and parts. Disposable personal income (DPI) – personal income less personal tax and nontax payments – rose moderately. Real DPI (DPI minus inflation) rose moderately since inflation was non-existent. Real PCE (Personal Consumption Expenditures minus inflation) actually rose very slightly due to nonexistent inflation (or actually very slight deflation). It is real DPI and real PCE that really matter since they measure how much additional spending power the consumer really has and how much they really use. It’s not really possible to draw much of a conclusion about the trend in income and spending from this report due to the dramatic short-term impact of the tax rebate in recent months.
The Conference Board Help Wanted Index for October registered no change in help-wanted advertising. This was a neutral report, suggesting some stabilization of the labor market. The index is still moderately below the level of a year ago. The Conference Board refers to their Help-Wanted Advertising Index as a “key barometer of America’s job market”. They opine that “Employers are in a wait-and-see mode when it comes to hiring. Although consumers continue to feel that jobs are hard to get right now, they do expect the job climate to improve over the next six months. But overall, job advertising volume is not moving up yet, awaiting more positive news.” Unfortunately, a lower percentage of labor markets have a rising want-ad volume (37%) than in September (39%), but still higher than in July (35%). I would note that in today’s job market and with the internet, companies simply don’t have to do as much newspaper advertising.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a sharp rise in applications, with a moderately sharp rise in applications to purchase – to the second highest level since the group began its weekly survey in 1990 – and a very sharp rise in refinancing. This was a positive report, but there does tend to be a lot of volatility. Nonetheless, demand for buying homes is still quite strong.
The Fed Beige Book for the period October 7th through November 16th indicated that “the economy continued to expand in October and early November” and “improvements appeared to be reasonably broadly based, with most districts noting growth in a number of industries.” This was a positive report, but there is still a fair amount of lingering weakness.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a moderately sharp rise to another new all-time high, and its six-month smoothed growth rate rose sharply but is still off its high at the beginning of August. This was a positive report, and continues to suggest reasonably strong growth in the months ahead.
[ * ] AMG Data Services reported that for the 4-day week ended Tuesday, November 25, $2.1 billion flowed into equity mutual funds. This was a positive report, especially coming on the heels of the recent publicity over mutual fund trading abuses. $205 million flowed into taxable bond funds. $24.9 billion flowed out of money market funds. $104 million flowed out of municipal bond funds, the 19th consecutive week of outflows.
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 2.33% on day to 15.91, which is only moderately above the lower end of the low anxiety (moderate complacency) zone (15 to 20). People were somewhat relieved that the recent gains have been maintained. 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 2.87% on Wednesday to 16.23. This is the third day that new VIX has closed above old VIX.
The Nasdaq-100 VIX (VXN) fell by 1.39% on Wednesday to 25.63.
The Nasdaq-100 After Hours Indicator had a negative tone for the Wednesday evening session, closing down 0.15 points, basically flat. People are once again very confused about where the market will head next.
[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 fell moderately against the yen and fell very sharply against the euro. Trading was volatile due to pre-holiday light volume. 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 very sharply, and is now once again modestly above the $30 “comfort” level. Weekly inventory levels were lower than expected. There was also another pipeline fire in Iraq. There is a lot of volatility, which speculators are mistakenly taking as a trend. Oil will be back below $30 soon enough. 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 very sharply, briefly trading above the magical $400 level, but succumbing to serious profit-taking and closing moderately below $400. 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.
U.S. forces are now almost continuously conducting raids and searches to confiscate weapons and detain people believed hostile to coalition forces. It does seem to be helping somewhat, but it is necessary to continue such operation with intensity, if not intensify them.
For the week ending Wednesday, November 26, the Pentagon reports that 734 fewer reservists are on active duty, for a total of 163,998. This was modest decrease. The Army, Air Force, Navy, and Marines all showed decreases in the number of reservists on active duty. The headcount has declined by 60,530 or 27% from the peak of 224,528 on May 1st.
Meanwhile, the Pentagon announced that the secretary of defense has approved the alert notifications of 4,228 Army, 1,290 Navy and 2,381 Air Force reserve component personnel for the second rotation of Operation Iraqi Freedom (OIF-2). The SECDEF also approved yesterday the mobilization of 9,900 Army, 1,290 Navy and 3,208 Air Force reserve component personnel for OIF-2. The SECDEF also authorized the Marine Corps to deploy an additional three battalions with corresponding combat support and combat service support units for operations in support of OIF- 2. Many of these troops are part of rotations, so that the net troops in Iraq will not rise by these numbers as others come home.
[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.
According to CBS.MarketWatch.com, Steven Miley, technical analyst at Merrill Lynch, said Tuesday’s stock market activity did not change his view that the major indexes have already reached their highs for 2003 and that the price activity through November reflects a developing consolidation phase. Miley is said to have written “This week’s rebound has eased the immediate risk that the consolidation will be defensive in nature; nevertheless, we do expect further erratic non-trend activity over the holiday period and into early December” in a note to clients. Note that Miley is a technical analyst, meaning that he looks at charts and momentum and support and resistance for past performance, rather than fundamentals and the economic and business outlook for the months ahead. Please also note Merrill’s conflict of interest: they stand to make money if clients sell (or short) stocks based on this “note to clients.” I do agree with Miley that we’re going to see a lot of “erratic non-trend activity”, but we always see a lot of erratic non-trend activity since that’s what the stock market does over short periods of time measured in a few weeks. I don’t agree that we’ve necessarily reached 2003 highs yet. For me, the trend to the end of the year will be based primarily on the net money flows for stock mutual funds, something that technical analysts completely ignore.
[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.
The Friday after Thanksgiving is a half day (till 1:00 p.m.) Trading will tend to be slow and volatile.
[ * ] It’s the last trading day of the month, so there could be a little window dressing, but sometimes that can mean selling as well as buying.
My forecast for Friday is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +10 on Wednesday, modestly 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 285 days (1 year and 35 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 13 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 178 days. Nasdaq is 14 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 77 days old and 14 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 24 days old and 14 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 13 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 was Day 4, but the point gain was too meager and volume too light to constitute confirmation. Friday is Day 5, but the half-day trading will probably preclude a high-volume rally. 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 still 39 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 86 points of decline before a true correction might be indicated. Note that we’re still 111 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 $2.1 billion in the most recent week and $3.5 billion in each of the two weeks before that.
[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 27, 2003 11:58:37 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology