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Clearly there was significant profit-taking for Nasdaq stocks on Wednesday, but it’s not clear if it was simply garden-variety profit-taking or something more. At least superficially, the sell-off was triggered by Nasdaq finally poking above the psychological 2,000 level but with little momentum. Certainly traders treated that lack of momentum as a bearish sign and reversed and bet on the downside. And once the run-up started to slide steeply, it surely looked like a “sure thing” bet for the shorts. There was probably also a fair amount of selling into the early rally even as momentum traders may have been piling on in anticipation of the “wonderful event” of breaking through the 2,000 level. The early rally was probably also boosted by short-covering. I’m sure there were plenty of cynics willing to short the market once they saw the early “irrational exuberance” peter out so quickly after piercing the 2,000 level. It’s difficult to say whether there may have been some real selling (e.g., possibly some mutual fund redemptions) going on underneath the passionate short-term trading. The bottom line is that we’ll simply have to wait a few days to see whether there is any follow-through selling, but for now the steep sell-off (41 points off the intra-day peak) is a fairly strong yellow flag.
Ultimately, it should be no real surprise that some significant profit-taking kicked in at the Nasdaq 2,000 level. That’s a common occurrence at levels that have a dramatic psychological significance. Sometimes it takes a bunch of attempts to finally break through and stay above such a level. Sure, it’s disappointing that we had such a steep sell-off in response to touching such a milestone, but we shouldn’t treat it as a great surprise or horrible disaster or sign of impending doom. The real question is whether enough real buying (such as mutual fund inflows) will materialize over the coming trading sessions to override any short-term technical trading considerations and cynicism of short-sellers.
Nasdaq set a new 52-week intra-day high of 2,000.92. That’s a positive sign, but the ensuing sell-off cancels its merit.
Nasdaq volume was very heavy (2.25 billion shares). Breadth was moderately strongly negative, with 1.82 losers for each gainer. This was a strong sell-off, except that the breadth was not as negative as one would expect on a truly strong sell-off.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Microsoft (MSFT), ADC Telecom (ADCT), Oracle (ORCL), JDS Uniphase (JDSU), Cisco (CSCO), HP (HPQ), and Motorola (MOT), but net buyers of Intel (INTC). Institutions were clearly selling heavily into the early rally, but also buying into the late-day dip, strongly suggesting that the market is not about to dramatically fall off a cliff any time in the near future.
The ISM Non-Manufacturing (Services) Report on Business for November registered a moderate decline in the rate of growth of business activity/production but remains at a very high level indicative of solid growth. This was a mixed, but relatively positive report. Production continued to increase, but at a moderately slower pace. New Orders continued to increase, but at a moderately slower pace. New Export Orders continued to increase, but at a moderately slower pace. The Backlog of [Unfilled] Orders continued to increase, but at a modestly slower pace. It’s good news that the order backlog is still growing since it is the ‘reserve’ that gives businesses confidence that they can increase production without needing to worry about occasional dips in new order flow. The really good news is that employment expanded for a second consecutive month and at a modestly faster pace, and has now expanded for five out of the past six months. 13 services industry groups grew in November, 2 contracted, and 2 were unchanged since October. 34% of ISM services members reported increased activity, compared to 38% in October. 12% reported reduced activity, the same number as in October. 54% reported no change in activity, up from 50% in October. It’s always difficult to judge a trend when a single period moves counter to the established trend. Cynics may say that the trend is over and headed down, but most trends have occasional periods where there is a little counter-trend movement before the trend resumes.
The Productivity and Costs report for Q3 registered a moderately sharp rise in productivity and a moderately sharp decline in unit labor costs. This was a positive report. It’s great news for businesses and corporate profits. It’s not good news for those worried about losing their jobs, but it reflects what was happening in Q3 and not what will necessarily happen in Q4 and beyond. It is good news for people who have jobs because the productivity gains and resulting profits mean that more money is available to pay higher wages. In fact, hourly compensation rose 2.7% over the past year (or 0.5% with inflation subtracted) and doesn’t take into account reduced taxes. Hours (labor input) increased, albeit by only a modest 0.8%, for only the second quarter since Q2 of 2000, hinting at a higher demand for workers.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a sharp decline in applications, with a moderately sharp decline in applications to purchase and a very sharp decline in refinancing. This was a negative report, but there does tend to be a lot of volatility and the “holiday-shortened week” gets a lot of the blame. Nonetheless, demand for buying homes is still quite strong.
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 0.73% on Wednesday to 16.30, which is in the lower half of the low anxiety (moderate complacency) zone (15 to 20). It’s not clear why VIX would fall when Nasdaq had such a steep loss. Possibly it indicates that more people are switching from using S&P 100 index options to S&P 500 index options for portfolio protection. Another possibility is that with the early run-up and heavy volume, maybe more people sold chunks of their stock portfolios and also sold the index options that they had been using to protect that stock from losses. Or, maybe people saw the sell-off as merely a short-term technical thing and are now more positive in their outlook now that Nasdaq actually managed to touch the 2,000 level. 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 2.21% on Wednesday to 16.63. People were moderately disappointed that the market reacted so negatively to Nasdaq touching the 2,000 level.
The Nasdaq-100 VIX (VXN) rose by 2.32% on Wednesday to 27.34.
The Nasdaq-100 After Hours Indicator had a mostly positive tone for the Wednesday evening session, closing up 0.98 points. People feel that the sell-off was overdone, but they’re still too gun-shy to jump right back in with much enthusiasm.
[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 fell moderately 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 rose sharply, and remains moderately above the $30 “comfort” level. The weekly inventory reports showed significant declines in crude oil inventories. There is also a lot of confusion about what OPEC will do with their production quotas. 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 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.
For the week ending Wednesday, December 3, the Pentagon reports that 246 more reservists are on active duty, for a total of 164,244. This was modest increase. The Army, Navy, and Marines all showed decreases in the number of reservists on active duty, but the Air Force showed an increase. The headcount has declined by 60,284 or 27% from the peak of 224,528 on May 1st.
The ongoing “cordon and search” operations seem to be reasonably effective at rooting out former regime holdouts and weapons. They can never guarantee to prevent all attacks, but they do help a lot to reduce the overall threat level. And, they send a clear message to Iraqis that we are serious about security and that choosing to disrupt security is not a move that will go unpunished.
[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.
I attended the open meeting of the Securities and Exchange Commission (SEC) here in Washington, D.C., which focused on proposed regulatory changes to address mutual fund trading abuses. There were three “items” on the agenda. The first was an amendment to eliminate late trading of “redeemable securities issued by a registered investment company” (SEC-speak for mutual fund shares). The second item was a new rule to require adoption and implementation of compliance policies and procedures, including the appointment of a chief compliance officer who reports directly to the board of directors for the fund. The third item was a bunch of amendments to require disclosures related to market timing, including policies and risks related to frequent trading and selective disclosure of portfolio holdings information. They voted to have all the proposed changes published for a public comment period. Once the comments are received and processed, the commission can then proceed to the final rubber stamping of the changes. I am a little bothered or at least confused by the proposed disclosures relating to market timing since they superficially don’t seem to outright ban the practices that came to light. But during the discussion between the commission members and staff, it seemed as if they were saying that the specific abuses amounted to fraud and failure to disclose those practices under the new amendments would be a violation, so simply requiring full disclosure of the fund policies might in fact prevent the abuses. Or at least that appears to be the theory. Market timing per se is not illegal, but the forms practiced in recent abuses were illegal. Part of the theory is that “sunshine is the best disinfectant”, so merely requiring disclosure of potentially embarrassing practices (e.g., giving some investors preferential and special treatment) should eliminate those practices, in theory.
I attended a panel discussion at the American Enterprise Institute on the topic of Korea’s economy, with an emphasis on trade. The main speaker recently published a study of how the Korean economy has evolved and what they need to do to plan for the future. He also focused on Korea’s trade relationship with the U.S., China, and the other countries of Asia. The other speakers offered their critiques of the book. One interesting part of the discussion concerned the roles of bilateral and multilateral trade agreements. The U.S. has lately been placing emphasis on lots of simple bilateral agreements, but the speakers acknowledged the limitations of those agreements, especially the fact that they really don’t automatically make it easier to deal with larger trade issues. There is a lot of anxiety over how to deal with China on trade issues.
The infamous steel tariffs will supposedly be scrapped today. There may not be a big net economic impact, but this action will remove one of the key talking points of the volatility crowd who have been monotonously chanting about an impending trade war and rising protectionism.
[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 weekly jobless claims report could move the market. The claims numbers have a lot of volatility and there tends to be a late-year seasonal uptrend in the underlying, unadjusted initial claims, but given the current state of the economy, anything could happen.
People will do some positioning in advance of the employment report due out on Friday. People expect a gain, but more modest than in October.
We may see some additional profit-taking, but we could also see a recovery bounce if there is any initial sell-off. More likely, we will see a bounce after the sell-off on Wednesday.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -20 on Wednesday, well 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 289 days (1 year and 39 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 17 days off its 52-week intra-day high of 1,992.27 on November 7, but only by less than 13 points. Nasdaq is 1 day off its 52-week intra-day high of 1,996.08 on December 2. Nasdaq set a new 52-week intra-day high of 2,000.92 on December 3. We need to track all three of these intra-day highs until Nasdaq manages to close above them for at least a couple of days. Technical traders will be chattering about Nasdaq establishing a “triple top”, a rather bearish sign, so we do need to give this a relatively severe yellow flag.
The confirmed up-leg for Nasdaq that began with the intraday low of 1,253.22 on March 12 has run for 182 days. Nasdaq is 2 days off 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 81 days old and 2 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 28 days old and 2 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 still not fully recovered, and it won’t be fully recovered until it closes above the previous peak of 1,976.37 for at least three 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 17 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.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, November 21 with an intra-day low of 1,878.07 is now 8 days old and 2 days off its closing peak. The fact that Nasdaq is 41 points off the intra-day peak for this new leg would suggest that this new leg may already be broken. Give it a couple more days before deciding for sure.
The fact that Nasdaq is still 41 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 84 points of decline before a true correction might be indicated. Note that we’re still 118 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 03, 2003 11:22:06 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology