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Monday was a fairly decent rally, although volume was a little on the light side. Nasdaq was able to set another new 52-week closing high and confirm the start of another minor up-leg. It would appear that the strong ISM manufacturing report was the catalyst, but I suspect that there were technical factors as well, not to mention the rising tide of mutual fund inflows. A fair amount of the rally was probably due to short-covering, but that’s to be expected when there is such a strong chorus of naysayers who keep shorting the market as if the economic recovery was already over.
Nasdaq volume was moderate (1.85 billion shares). Breadth was moderately positive, with 1.85 gainers for each loser. This was a semi-decent rally. Volume was a bit on the light side and breadth wasn’t as solid as it could have been.
According to Thomson Financial I-Watch, institutional investors were net sellers of Microsoft (MSFT), Intel (INTC), Applied Materials (AMAT), Cisco (CSCO), JDS Uniphase (JDSU), Oracle (ORCL), EMC (EMC), and HP (HPQ), but net buyers of Sun (SUNW). Institutions were clearly selling into the rally, but they frequently do so after buying recent dips, so there is no reason to believe that the market will dramatically fall off a cliff any time in the near future.
The ISM Manufacturing Report on Business for November registered a moderate gain in the PMI which is now well above 50.0, and above 50.0 for a fifth consecutive month, indicating that the manufacturing sector is now expanding at an almost-decent pace. This was a very positive report. ISM noted that “The manufacturing sector enjoyed its best month since December 1983. The big improvement is in Employment as the index rose above 50 percent, indicating growth, following 37 consecutive months of decline. The momentum is coming from continued strength in New Orders and Production as the indexes are presently at very lofty levels.” The good news is that Production, New Orders, and the Backlog of [unfilled] Orders are all growing, and at a faster pace. New export orders continue to grow, but at a slower pace. Employment is finally expanding, albeit at a modest pace, after a protracted contraction. According to the report, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through November (52.3 percent) corresponds to a 3.4 percent increase in real gross domestic product (GDP). However, if the PMI for November (62.8 percent) is annualized, this corresponds to a 7.3 percent increase in GDP.” The real bottom line of this report is that the manufacturing sector showed some additional real improvement in November. We’re still not out of the woods (since we need to demonstrate sustainability), but we’re now making steady progress.
The Construction Spending report for October registered a moderately sharp rise (0.9%) in the value of “construction put in place”. This was a positive report. Private construction rose moderately sharply (up 0.8%) and public construction rose moderately sharply (up 1.2%). Residential was up sharply (2.2%). Manufacturing construction was down very sharply (7.4%). Total construction was up 7.0% from a year ago. It’s difficult to get a clear read on where construction spending might be headed over the coming year, but for now it’s holding up nicely.
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 4.43% on Monday to 15.97, which is only moderately above the lower end of the low anxiety (moderate complacency) zone (15 to 20). The nice market rally was a welcome relief. 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 2.76% on Monday to 16.77. This is the first time that new VIX went in the opposite direction from old VIX. This suggests that more people are using S&P 500 index options (rather than S&P 100 index options) to buy protection for their portfolios. It also suggests that at least some people are viewing the current market levels as very susceptible to steep profit-taking. I would suggest that this is a contrarian bullish indicator.
The Nasdaq-100 VIX (VXN) rose by 2.58% on Monday to 26.29. People are anxious that Nasdaq may be increasingly prone to steep profit-taking. I would suggest that this is another contrarian bullish indicator.
The Nasdaq-100 After Hours Indicator had a negative tone for the Monday evening session, closing down 3.37 points. People were anxious to take profits after the rally. There isn’t a lot of conviction that the gains will stick.
[11/29/03] 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 April or May. 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 was unchanged against the yen and rose 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 fell very sharply, and is once again under the $30 “comfort” level, albeit slightly. 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 sharply, and finally managed to close above the magical $400 level. There is nothing fundamentally significant about $400; it’s simply a psychological level. 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.
Dupont (DD) announced a new cost-cutting initiative which will cut spending and jobs over the next two years. They didn’t say how many jobs they would cut. This is good news for shareholders, but bad news for those people whose jobs will be cut and those venders whose revenue will be reduced. It is good news overall because it indicates that the restructuring of the U.S. economy is making good progress. The bad news is that the recovery of the economy will continue to be gradual over the next two years as the costs of restructuring continue to be a drag on the economy. Actually, it’s not bad news since a more gradual recovery is actually a good thing and will make the recovery more sustainable.
I attended a lecture at the American Enterprise Institute here in Washington, D.C. that was intended as a “brief introductory guide to how Leo Strauss’s writings may be said to offer a deeper understanding of contemporary politics” by Thomas Pangle, professor of political science at the University of Toronto. There has been a lot of chatter in the media lately about how Strauss’s teachings have formed much of the philosophical basis for the so-called necons (neo-conservatives). The neocons have objected that the media, especially The New York Times, have misrepresented the philosophy of Strauss, so this lecture was an attempt to set the record straight. The talk was very interesting and filled with a tremendous amount of insight into Strauss’s approach to philosophy, but may in fact have overloaded the debate with detail while not resolving the central issues related to what are the philosophical underpinnings of the broad range of people labeled as neoconservatives. When asked a direct question about Deputy Secretary of Defense Paul Wolfowitz, Pangle begged off. Pangle and Wolfowitz were roommates while studying under Strauss. I listened to the lecture very carefully and took detailed notes, but regret to say that I am unable to briefly summarize Strauss’s philosophy, or even any specific teachings. What the lecture did successfully convey was a summary of many of the philosophical issues that confronted Strauss. There was a lot of discussion of the struggles between the philosophical beliefs of the ancients (the Greeks such as Socrates and Aristotle) and the moderns (the philosophers of The Enlightenment). Although the neocons are adherents to the importance of modernity, Strauss seemed to accept quite a bit of the ancient philosophy, especially as it relates politics. I wish I could say that the lecture clarified things, but it raised more questions than it answered. Nonetheless, I found that it was quite fascinating and enlightening, even if it didn’t resolve all the confusion about what kind of a political philosophy is really driving the neocons. I continue to be amused by the way that the neocons accept the label that has been applied to them and even laugh off much of the criticism and scorn that is heaped on them by their liberal critics. The head of AEI even jokingly referred to “the protocols for world domination” in his introductory comments. This lecture certainly wasn’t the last word, but merely the latest salvo in the battle between the neocons and the liberals.
[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.
We could see some profit-taking after the rally on Monday, but not necessarily. It’s also possible that we could see some modest profit-taking followed by a nice recovery and continuation of the rally.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +30 on Monday, well 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 287 days (1 year and 37 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 very soon, so the question is whether we hit 2,100 or 2,250 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 15 days off its 52-week intra-day high of 1,992.27 on November 7, but only by less than 3 points.
The confirmed up-leg for Nasdaq that began with the intraday low of 1,253.22 on March 12 has run for 180 days. Nasdaq is at its closing peak of 1,989.82 on December 1 for the up-leg and for the overall post-October 2002 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 79 days old and at 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 26 days old and at 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 now mostly recovered, but it won’t be fully recovered until it closes above the previous peak of 1,976.37 for at least two more days and sets a new closing peak at least 1% above that old peak (1,996.13).
The Nasdaq correction off the intra-day high of 1,992.27 on November 7 is now 15 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 do need to see a new 52-week closing high above that old intra-day high.
We have confirmation of a new minor 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. Last 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 was Day 5, but the point gain was too modest and volume too light to be a confirmation. Monday was Day 6 with a 1.5% gain on moderate volume, which is good enough for confirmation of the new minor up-leg. 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 3 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 122 points of decline before a true correction might be indicated. Note that we’re still 148 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: December 02, 2003 01:27:08 AM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology