| 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 [ * ])
There simply isn’t enough money flowing into the market on a regular basis to see a strong rally such as on Thursday without seeing some profit-taking the next day. The good news is that the level of profit taking was so mild on Friday. It wasn’t exactly a slow day either, with semi-decent trading volume, but with excessively choppy trading. That’s exactly what you’d expect to see on a “quadruple witching” option and futures expiration day.
Nasdaq opened higher, but immediately ran into selling. Mostly that was due to traders running up stock prices a little in the pre-market and then reversing their positions when there was no significant buying interest immediately after the market opened. That happens a lot and is more a testament to the friskiness of the day traders than a statement about the longer-term trend of the market.
Nasdaq volume was moderate (1.87 billion shares). Breadth was modestly negative, with 1.13 losers for each gainer. This was a very modest profit-taking session.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), JDS Uniphase (JDSU), Nortel (NT), and Applied Materials (AMAT), but net buyers of Microsoft (MSFT), EMC (EMC), Intel (INTC), Cisco (CSCO), and HP (HPQ). It was a mixed day, with institutions selling into the rallies as well as buying the dips, strongly suggesting that the market is not about to dramatically fall off a cliff any time in the near future. There was heavy institutional buying of Microsoft, again.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp rise, only modestly below its recent high, but its six-month smoothed growth rate declined modestly. This was a mixed report, but continues to suggest reasonably strong growth in the months ahead.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a slight decline (0.08 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended December 19th. This was a relatively neutral, but slightly positive report. Gasoline is 6.51 cents higher than the average on the same day last year. Gasoline prices are expected to rise due to rising wholesale prices caused by higher crude prices. Prices may also go up due to two new standards going into effect in January, one for low sulfur gasoline and the other a ban on MBTE in New York, Connecticut, and California.
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 1.23% on Friday to 16.05, which is in the lower half of the low anxiety (moderate complacency) zone (15 to 20). People were a little relieved to see such a modest level of profit taking after Thursday’s rally. 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 1.61% on Friday to 16.42. People bought a little more portfolio insurance since the rallies in the Dow and S&P 500 may be a bit overextended.
The Nasdaq-100 VIX (VXN) rose by 1.47% on Friday to 24.89. People were a little disappointed that the rally lost its steam, again.
The Nasdaq-100 After Hours Indicator had a mixed tone for the Friday evening session, closing down 0.09 points. People aren’t willing to place any heavy bets on or against the market going into a holiday week.
[12/19/03] The fed funds futures market suggests that the Fed will leave the fed funds target rate unchanged for the next few months, but possibly raise the fed funds target rate by a quarter-point in May, June or July, with another quarter-point hike in August or September. 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 modestly 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, but remains moderately above the $32 “anxiety” level. Some of the recent volatility was simply due to switching from the January front month futures to February. 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 moderately. In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[ * ] Libya’s agreement to give up its weapons of mass destruction programs is good news, but not a very big deal in terms of its net near-term impact. It was bound to happen anyway once Libya made the big step of agreeing to compensate the PanAm bombing victims. Clearly Libya has been moving in the direction of wanting to have UN and U.S. sanctions lifted. The U.S. may not lift sanctions for a while longer, until Libya has proven through its actions over time that it is truly abandoning both terrorism and WMDs. The U.S. economy will stand to gain once the U.S. lifts the economic sanctions, giving the U.S. another source of oil and another export market for goods and services.
[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.
There was some chatter about some possible suicide bombing threats, but nothing terribly specific, and nothing for investors to worry about.
[ * ] The upgrade of the alert level from yellow to orange is not completely unexpected and can safely be ignored by true investors, no matter how much traders try to incite a sell-off.
[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.
There is some chatter that the recent strength of the IPO market is a sign of an “overvalued stock market.” The chatterers are suggesting that nobody in their right mind would do an IPO of their stock unless the market was overvalued. That maybe true on paper or in academic circles, but the chatterers fail to take the real world into account. Besides, mostly what the chatterers are trying to do is suggest that an overvalued market is a market that is likely to decline and that stocks are not a good investment at this time. Many of these people are simply trying to incite a little volatility in the market – intending to profit either by trading or collecting commissions or transaction fees when naïve investors get duped into abandoning their positions and then buying them back again later. Some of them simply want stocks to decline so that they can buy them at a lower price. Valuation is only one part of the calculus for an IPO. Businesses and venture investors also have liquidity needs – they would like to take their gains and use them elsewhere. Even if a company could get a better valuation if they waited three or six or twelve months, they may not have the cash reserves to do so. And, the company might have dramatically better performance over the next three, six, or twelve months than if they didn’t have that IPO cash in hand to fund growth. Besides, timing the stock market is not something on which business decisions should be based. Timing the stock market is risky, and businesses need less risk, not more. If the underwriters tell the company how much they can get on the market, the company decides whether that’s an acceptable return and that’s that. If the stock market is up over the past year, then more companies are going to cross over the threshold of an acceptable target return. Venture investors have a different need than the companies themselves: to exit their venture investments as soon as they have achieved a sufficient level of return. The venture investors typically don’t sell their stakes at the IPO, but distribute the shares to their own investors who then make an independent decision as to how long to hold or when to dump the shares. That in itself is a very good point that the chatterers ignore: how many venture investors will want to destroy their reputations by distributing stock back to investors just before the market declines? Not many. So, part of the IPO calculus is not just to go out when the market is strong, but with the expectation that the market will be strong for many months to come. Another reason not to IPO too close to a market top is that there tend to be restrictions or so-called “lock up periods” which actually prevent many of those venture investors and company executives from dumping their shares for at least several months. An IPO is not the only exit strategy for the venture investors. If market conditions are weak or expected to get weaker, they would seek to sell the company to an established company. It is also worth noting that there is a significant backlog of venture investments that were made in 2000, 2001, and 2002 who have been patiently waiting for the market to return to levels at which an IPO would give the venture investors a decent rate of return. So, the renewed IPO stream at present has more to do with pent-up demand and need for venture investor liquidity than whether valuations are peaking. The debate over whether stocks and the market are overvalued will go on forever. Most stocks are usually overvalued most of the time anyway due to expectations for future growth. Even when stocks are least valued, at times of great economic or company stress, they’re still typically overvalued by some measures of valuation. In summary, the IPO rate is not a good indicator of whether a market is overvalued or likely to decline in the near future. Besides, the IPO rate is still very anemic compared to what you would see if the market was really roaring, which it isn’t. We’re in the early stages of the IPO market, not near the end of the line.
The CFTC (Commodity Futures Trading Commission) Commitments of Traders report for the week ended Tuesday, December 16 indicated a modest increase in the ratio of open commercial S&P 500 index futures long positions to short positions from 0.94 to 0.97, indicating that “the smart money” is modestly less bearish and have modestly decreased their betting that the S&P 500 index will decline. Traders added heavily to their short positions, but added even more heavily to their long positions. Trading of the “e-mini” S&P 500 index futures indicated a moderately sharp decrease in the ratio of longs to shorts from 1.02 to 0.91 indicating that amateur traders switched from being slightly bullish to modestly bearish. They added heavily to their long positions, but added much more heavily to their short positions. So, sentiment is split, with the bears becoming much more bearish and the bulls becoming more bullish. Trading of the Nasdaq-100 index futures indicated a moderate increase in the ratio of longs to shorts from 0.77 to 0.84, indicating that “the smart money” was still quite bearish, but moderately less so. Traders added to both their long and short positions in equal measures. Trading of the “mini” Nasdaq-100 index futures indicated a very slight decrease in the ratio of longs to shorts from 1.270 to 1.269, indicating that amateur traders were still somewhat bullish, but very slightly less so. Amateur traders added significantly to both their long and 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.
As a result of the holiday-shortened week, trading volume will tend to be lower, hence volatility will tend to be higher.
[ * ] Irresponsible traders will probably attempt to have a field day (i.e., attempt to incite a sell-off) based on the alert level going from yellow up to orange, but true investors should ignore those shameful attempts to manipulate the market. If traders do manage to kick off an early “rout”, in all likelihood it will probably quickly result in “selling exhaustion” followed by a reversal and lots of short-covering. Nonetheless, stock mutual fund inflows are still low enough and inconsistent enough that a chance lack of inflows on Monday could be mistakenly seen as a sign of significant market weakness, when in reality it is simply a daily fluctuation.
My forecast for Monday is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -5 on Friday, moderately below the midpoint of my range of -40 to +50.
[12/20/03] Nasdaq appears to be stuck in a trading range, with upwards movement stymied by significant technical resistance at the 2,000 level, for now, until sufficient stock mutual fund inflows lift Nasdaq high enough to counteract negative trader and speculator sentiment. The good news is that this extended trading range will provide a significant support base once Nasdaq does break out above 2,000.
The confirmed bull market for Nasdaq that began on October 9, 2002 (and was confirmed on June 16, 2003) has run for 301 days (1 year and 51 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 29 days off its 52-week intra-day high of 1,992.27 on November 7. Nasdaq is 13 days off its 52-week intra-day high of 1,996.08 on December 2. Nasdaq is 12 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 194 days. Nasdaq is 14 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 93 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 40 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 still significantly broken, 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 29 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 12 days old. It reached an intra-day low of 1,887.46 on Wednesday, December 10, a decline of 113 points or 5.67%. It may be over or close to 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 20 days old and 14 days off its closing peak. The fact that Nasdaq is 50 points off the intra-day peak for this new leg indicates that this leg is still significantly broken, but not yet destroyed. Give it a couple more days before deciding for sure.
The confirmed minor up-leg of the Nasdaq advance that started on Wednesday, December 10 with an intra-day low of 1,887.46 and a bounce of 17 points into the close is now 8 days old and 1 day off its closing peak of 1,956.18 on December 18. The intra-day peak for this up-leg was 1,979.78 on December 15. The fact that we are still moderately off the intra-day peak for the leg remains a yellow flag.
The potential up-leg of the Nasdaq advance that started on Tuesday, December 16 with an intra-day low of 1,901.66 and a bounce of 24 points into the close is now 4 days old and 1 day off its closing peak of 1,956.18 on December 18. The intra-day peak for this up-leg was 1,963.28 on December 19. 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. Wednesday was Day 2 with a modest decline, but the intra-day low for the leg remains intact. Thursday was Day 3 with a nice 35-point gain, but we don’t get confirmation on Days 2 or 3 because it’s so common to see temporary dead-cat recovery bounces that tend to evaporate as quickly as they appear. Friday was Day 4 with a modest loss. Monday will be Day 5.
The fact that Nasdaq is still 50 points off its recent 52-week intra-day high is a solid 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 are still 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 75 points of decline before a true correction might be indicated. Note that we’re still 64 points above the starting level of the most recent confirmed minor up-leg that started on December 10. The big wildcard remains mutual fund money flows – which were inflows of $1.9 billion in the most recent week, $1.8 billion in the previous week, $2.6 billion in the previous week, $2.1 billion in 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 21, 2003 10:09:20 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology