| NOTICE: I regret to inform you that I will probably no longer to be able to
provide this column on a daily basis after the end December, possibly even
sooner. I may occasionally provide commentary, but not on an regular,
daily basis. Hopefully I will be able to resume daily service at some
point. The web site and archive will remain at least through May.
Click
here if you wish to be notified by email if and when service resumes. Basically, I have been living off capital for the past four years (stock profits from "the boom"), but my capital burn rate for my living expenses has significantly exceeded my rate of return, even for the past year. The result is that I regretfully will be forced to seek a full-time "normal" job and hence I will be unlikely to be able to devote the five or more hours that go into this column every day. I had hoped that the market would bounce back more strongly so that my return would exceed my burn rate, but that didn't happen and I had burned through too much of my capital base by the time the market did start to take off in October 2002. I had also hoped that I would be able to build interest in this site via word of mouth, and that really didn't happen either. I would have to have ten times as many readers and have each of them pay the full suggested rate to make the site financially viable on its own. There is simply too much competition in the investment newsletter/web site business to expect that kind of interest. My thanks to all those loyal readers who have paid for their usage of the site. -- Jack Krupansky -- still The Unrepentent Optimist - 12/6/03 |
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(Updated since Saturday – changes marked with [ * ])
Superficially, the Nasdaq decline on Friday gets blamed on a less than glowing report from Intel (INTC) and a similarly lackluster report on employment. But mostly the decline was probably technical in nature with speculators having fairly tight stop-loss orders that traders were able to trigger by pushing down stocks in the pre-market.
The Intel and employment reports were good enough to maintain confidence in the economic recovery, albeit at a gradual pace, which is good because that will be more sustainable.
Most of the decline actually occurred in the pre-market, with Nasdaq opening down 20 points. Nasdaq tried to recover, but by noon it was right back where it opened. It went nowhere until 1:00 pm., when it suddenly declined 15 points by 2:00 p.m. That was the intra-day low, and Nasdaq recovered a little in the final two hours of trading. This was not the kind of trading pattern that you would see if there was sustained, real selling. This was more of a technical sell-off.
It’s possible that the winter storm kept a lot of people out of the market.
The push to break through the Nasdaq 2,000 level was a little too premature and too tentative. The result has been that some number of traders and speculators appear to believe firmly that a correction off that premature peak is needed. They will wait for such a correction to finish playing out and in fact they will actively assist the market in moving down. There is plenty of trading froth in the market, so such a correction is relatively easy for traders and speculators to engineer. Eventually they will run into the gradually rising tide of stock mutual fund in-flows, which will force people to reverse and once again bet on the up-side.
Nasdaq volume was light (1.67 billion shares). Breadth was almost strongly negative, with 1.91 losers for each gainer. Despite the point decline, this was a fairly modest sell-off with little true conviction. It appeared to be driven more by an absence of motivated buyers rather than the presence of determined sellers.
According to Thomson Financial I-Watch, institutional investors were net sellers of Microsoft (MSFT) and HP (HPQ), but net buyers of Intel (INTC), Sun (SUNW), Oracle (ORCL), Cisco (CSCO), EMC (EMC), JDS Uniphase (JDSU), and Applied Materials (AMAT). Institutions were clearly buying the dip, strongly suggesting that the market is unlikely to dramatically fall off a cliff any time in the near future. Note that there was significant institutional buying of Intel, despite the negative reaction of traders and speculators.
The Employment Situation report for November registered a modest rise in nonfarm payroll employment and a slight decline in the unemployment rate. This was a modestly positive report, continuing the trend of gradual improvement. The headline job gain was 57,000, which is statistically insignificant. Ex the seasonal adjustment, we gained 143,000 nonfarm payroll jobs, which is still statistically insignificant. October was revised up from a gain of 126,000 to a gain of 137,000 jobs. Manufacturing lost another 17,000 jobs, or 19,000 ex adjustment, which is a slower pace of decline. Temporary help (a leading indicator of future employment) was up 20,800, but down 34,600 ex adjustment. Unemployment fell by 105,000, and that was really an increase of 100,000 ex adjustment. There was a modest decrease of 244,000 in the number of people who were no longer in the labor force, but that was really an increase of 58,000 ex adjustment. The population grew by 240,000. Household employment rose by 589,000, but ex adjustment rose by only 81,000, and is higher than a year ago by 2.02 million, its highest level ever. Nonfarm payroll employment is now 2.17 million below the peak level of 133.372 million (unadjusted) in November 2000 and 230,000 below a year ago. Hourly earnings rose slightly, and the average weekly earnings rose modestly. The average workweek rose slightly, but the average manufacturing workweek rose modestly. Manufacturing overtime rose slightly. Computer and electronic product firms saw a loss of 1,800 jobs or actually a gain of 200 ex adjustment. The household survey covers the calendar week containing the 12th of the month, and the payroll survey covers the pay period that includes the 12th. Please note that employment is a lagging indicator for economic activity and won’t show any dramatic growth until GDP growth kicks up above 4% for several quarters (assuming productivity remains high). Despite the disheartening appearance of the headline number, the labor market is actually doing ‘okay’ for right now since output is still picking up at a relatively gradual pace (relative to productivity growth).
The Consumer Credit report for October registered a slight rise in outstanding consumer credit. This was a slightly positive report. Expansion of consumer borrowing is normally a key part of a recovery, but since we haven’t had a massive correction of consumer debt due to bankruptcies, we wouldn’t want to see a huge rise of consumer debt here. Note that home mortgages are not counted as “consumer debt”.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp decline (off its new all-time high), and its six-month smoothed growth rate declined modestly. This was a negative report, but continues to suggest reasonably strong growth in the months ahead. The decline was mostly due to stocks being weak, higher jobless claims, and lower mortgage applications. All of this stuff fluctuates a lot from week to week.
[ * ] Sunday: The Machine Tool Consumption report, released by the American Machine Tool Distributors’ Association (AMTDA) and the Association for Manufacturing Technology (AMT), for October registered a sharp fall (26.6%) in demand for machine tools over September (reversing the sharp gain in September), and was moderately lower (8.7%) than in October 2002. This was a negative report, but there is a lot of volatility and seasonality. Although this report by itself was negative, the smoothed trend may in fact be rising since a low in March. The AMTDA said that “Manufacturing output is improving and the impact on machine tool orders is positive but uneven.” Demand for machine tools is supposed to be a leading indicator for the manufacturing sector.
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, rose by 4.71% on Friday to 17.34, which is modestly below the midpoint of the low anxiety (moderate complacency) zone (15 to 20). People were somewhat alarmed by the market weakness and failure to recover. 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 4.85% on Friday to 17.09. Old and new VIX behaved similarly, for a change.
The Nasdaq-100 VIX (VXN) rose by 0.90% on Friday to 27.05.
The Nasdaq-100 After Hours Indicator had a positive tone for the Friday evening session, closing up 1.68 points. People once again feel that the sell-off was overdone, but they’re still a bit gun-shy about jumping back in until the dust has settled more clearly.
[12/6/03] 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, or possibly not until July. 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 moderately sharply 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, but remains moderately above 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 rose moderately 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.
[ * ] In case you were wondering where to find the web site for the U.S. Coalition Provisional Authority in Iraq, here it is: http://www.cpa-iraq.org/.
[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.
The CFTC (Commodity Futures Trading Commission) Commitments of Traders report for the week ended December 2 indicated a very slight decrease in the ratio of open commercial S&P 500 index futures long positions to short positions from 0.953 to 0.952, indicating that “the smart money” is very slightly more bearish and have very slightly increased their betting that the S&P 500 index will decline. Traders cut their short positions modestly, and cut their long positions slightly more. Trading of the “e-mini” S&P 500 index futures indicated a moderate increase in the ratio of longs to shorts from 1.01 to 1.05 indicating that amateur traders are moderately more bullish. They added moderately to their short positions, but add significantly more to their long positions. Trading of the Nasdaq-100 index futures indicated no change in the ratio of longs to shorts at 0.733, indicating that “the smart money” was still quite bearish. Traders lightened up very modestly on both their long and short positions. Trading of the “mini” Nasdaq-100 index futures indicated a modest decrease in the ratio of longs to shorts from 1.17 to 1.15, indicating that amateur traders were still somewhat bullish, but modestly less so. Amateur traders added modestly to their long positions, but added more significantly to their short positions. In general, the “smart money” tends to be more “right” (eventually) than the amateurs. But, the smart money can be a contrarian indicator as it moves to a limit at which point it will tend to reverse. Also, it is not possible to tell with any certainty whether a position is truly an outright bet or merely a hedge for some other position (e.g., you own some stock but you short some futures as “protection” from a market decline). And finally, we don’t know what traders were up to during the days since last Tuesday.
[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 correction could continue, but may well have mostly run its course.
[ * ] People are still chattering away about Intel as if some major calamity had occurred. Intel has been trading in a range for a while and their outlook is still reasonably promising. Friday was plenty of opportunity for traders, speculators, and investors to adjust their Intel positions, so there is absolutely no reason for the continued chatter about Intel. Traders frequently engage in what I call “setting up a false straw man”, where they set up an unreasonably optimistic target and begin chattering about that unreasonable target as if it were a done deal and then scream bloody murder when their unreasonable target is not met. The infamous whisper number is one favored form of the false straw man. Investors and longer-term speculators are not swayed by these kinds of short-term games. Traders can run up and run down the market as much as they want, but not all market moves are exclusively the work of short-term traders and speculators. Traders can play these games, but it simply doesn’t take the traders more than a day to play out the end-game for such games. Rest assured, there is nothing wrong with Intel (the write-down being a mere annoyance rather than a major problem) and their outlook is quite sound. The market direction on Monday will most likely be independent of any concerns over Intel.
People will be on “Fed watch” for the FOMC meeting on Tuesday, December 9. Nobody expects a change in interest rates, but there is intense debate about the text of the statement. Some people are passionately arguing that the Fed will drop the wording that indicates that “policy accommodation can be maintained for a considerable period.” There’s no good reason to drop it now and the sentiment won’t change as long as the recovery remains gradual, with employment growth still subdued.
My forecast for Monday is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -31 on Friday, only moderately above the lower 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 291 days (1 year and 41 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 fairly 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 19 days off its 52-week intra-day high of 1,992.27 on November 7. Nasdaq is 3 days off its 52-week intra-day high of 1,996.08 on December 2. Nasdaq is 2 days off its 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 184 days. Nasdaq is 4 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 83 days old and 4 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 30 days old and 4 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 19 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 a secondary correction off the intra-day high of 2,000.92 on December 3 that is now 2 days old. It reached an intra-day low of 1,935.58 on Friday, December 5, a decline of 65 points or 3.27%. It may be over, but that will only be confirmed when we 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 10 days old and 4 days off its closing peak. The fact that Nasdaq is 63 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.
We have to invalidate the potential up-leg of the Nasdaq advance that started on Thursday, December 4 with an intra-day low of 1,942.67 and a bounce of 26 points into the close due to setting a new intra-day low of 1,935.58 on Friday, December 5. We now look for the start of a new up-leg.
We now have yet another potential up-leg of the Nasdaq advance starting on Friday, December 5 with an intra-day low of 1,935.58 and a bounce of a mere 2 points into the close. We now wait for confirmation of this potential up-leg. We ignore Days 2 and 3 of the up-leg as long as a new intra-day low is not set. Then on Days 4 through 10 we look for a gain of at least 1% on volume higher than the previous day to signal confirmation.
The fact that Nasdaq is still 63 points off its recent 52-week intra-day high is a strong 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 62 points of decline before a true correction might be indicated. Note that we’re still 60 points above the starting level of the most recent confirmed minor up-leg that started on November 21. The big wildcard remains mutual fund money flows – which were inflows of $2.6 billion in the most recent week, $2.1 billion the previous 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 07, 2003 11:25:56 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology