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| NOTICE: I'll be going out to Colorado for some software consulting work on Wednesday (9/15/04). It's unclear when I'll be back online with my next column after the Wednesday column. It could be just a couple of days, or it could be a couple of weeks. I'll try to get something posted by Monday. My apologies for any inconvenience. |
Tuesday seemed like a setup for profit-taking, but speculators who bet too heavily on that outcome were forced to concede defeat. Ultimately it was a slow day of ‘treading water’ as we wait to see wait to see who will step up first, more buyers or more sellers. Nonetheless, the meager 5.02-point gain and significant volatility are moderate yellow flags.
Nasdaq opened with a slight negative tone, trended down until shortly after 10:00 a.m., but then reversed and trended modestly upwards for the rest of the day, closing 14 points above the intra-day low. That’s a positive sign, but doesn’t completely offset the yellow flags.
Nasdaq volume was very light (1.51 billion shares). Breadth was moderately positive, with 1.44 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Lucent (LU), and Qwest (Q), but net buyers of Nortel (NT), Cisco (CSCO), Micron (MU), AMD (AMD), JDS Uniphase (JDSU), and Texas Instruments (TXN).
The Retail Sales report for August registered a modest decline (-0.3% vs. +0.7% last month), but a modest rise ex autos (+0.2% vs. +0.2% last month). This was a mixed, but modestly positive report. Retail sales were up +7.8% compared to a year ago (vs. +6.5% last month) and up +9.0% (vs. +7.8% last month) ex autos.
The ICSC-UBS Weekly Chain Store Sales Snapshot registered a modest rise (+0.2% vs. unchanged last week) for the week ended September 11 compared to the prior week, and sales were up moderately (+2.7% vs. +2.1% last week) compared to a year ago for “comparable-store sales”. This was a positive report, but there is a lot of volatility. The group is forecasting 2.0-3.0% growth for the month of September on a year-over-year basis.
The weekly Redbook Research Sales Average report registered a sharp rise in chain store sales (+1.0%) for sales so far in September (September 11) compared to the same period in August and registered a moderate gain (+3.0%) for the week compared to a year ago. This was a positive report. The gain may have been boosted by strong demand for supplies after Hurricane Frances.
NOTICE: I am still using the “old” VIX even though CBOE began offering the “new” VIX on September 22, 2003. 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 Volatility Index (VIX), which measures the level of anxiety in the market, rose by 1.12% on Tuesday to 13.55, which is in the upper half of the very low anxiety (high complacency) zone (10 to 15). People were a little bothered by the market volatility (not to be confused with the implied market volatility which is what VIX ‘measures’). 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 2.96% on Tuesday to 13.56. People are getting a little worried that the recent advance may have run its course. The good news is that kind of worry could well be a contrarian bullish indicator. It would be bearish if people weren’t worried.
The Nasdaq-100 VIX (VXN) rose by 1.83% on Tuesday to 19.49.
The Nasdaq-100 After Hours Indicator had a negative tone for the Tuesday evening session, closing down 0.29 points. People are beginning to take some profits as they wonder if the recent advance may have run its course.
As a result of the mediocre retail sales report, there was a moderate decline in the odds of Fed interest rate hikes in the first half of next year.
[9/9/04] The fed funds futures market suggests a quarter-point hike (to 1.75%) at the September 21 FOMC meeting, no hike at the November 10 FOMC meeting, a quarter-point hike (to 2.00%) at the December 14 FOMC meeting, no hike at the February 1/2 FOMC meeting, a quarter-point hike (to 2.25%) at the March 22 FOMC meeting, no hike at the May 3 FOMC meeting, and a quarter-point hike (to 2.50%) at the June 29/30 FOMC meeting. Fed funds futures are at best accurate no more than six weeks out, so those longer-term moves are purely speculative, at best.
[6/18/04] The Fed is not likely to quickly raise interest rates all the way to a so-called ‘neutral’ stance (somewhere in the 3-4.5% range) over the coming year, primarily because the recovery is not yet complete (e.g., look at the lingering level of unemployment and the state of the airline, telecom, and manufacturing sectors). Rather, the Fed will simply remove the ‘excess’ stimulus (call it the ‘deflation hedge’) so that only a moderate level of ‘accommodation’ remains. In other words, despite the relatively rapid pace of expected hikes over the coming year, the initial ‘campaign’ will likely end at a target fed funds rate of 1.75% to 2.75% with the remaining rise to the fully ‘neutral’ stance coming only very gradually over the next two to three years as the remaining weakness in the economy gradually dissipates. Also, expect interest rates to be below the full ‘neutral’ level until the lingering geopolitical uncertainty related to the war on terrorism and the situation in Iraq and anxiety over the potential for oil supply disruptions dissipates. And finally, since high energy prices act as a ‘tax’, the Fed may feel pressured to keep interest rates a little lower than otherwise expected to compensate for the drag of that tax if it persists for more than a few months.
The dollar fell moderately against the yen but rose slightly 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 AAA Daily Fuel Gauge Report registered a modest 0.2 cent decline for the average price of a gallon of regular unleaded gasoline as of Monday ($1.839 vs. $1.841), after two days of no change after a one-day rise after twelve consecutive days without a rise after five consecutive days of rises after seventeen days without a rise, and is now 2.0 cents below the level of a month ago ($1.859) and 21.5 cents below the May 26, 2004 peak of $2.054.
The price of oil (NYMEX October crude futures) rose sharply, and is now moderately above the $44 “very high anxiety” level. Hurricane Ivan was the primary cause of the rise. Tropical Storm Jeanne could cause some disruption of the Hovensa refinery on St. Croix over the next two days. 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 (NYMEX December gold futures) rose moderately, and remains modestly above the $400 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.
It is awfully messy over there, but the stakes are high and there are a lot of people who would like the U.S. efforts to fail. As a result of all of this, Iraq will be a much stronger democracy when it does finally emerge from ‘the fire’.
[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.
[6/29/04] As an experiment, I have set up a new account with ShareBuilder and will be making a modest dollar-cost averaging investment each month. At a cost of $4 per month I will be buying a fixed dollar amount of the S&P 500 Tech Sector ‘Spider’ (XLK). The money for the investment will be automatically taken from my bank checking account. My purchases will be made on the first Tuesday of each month, beginning on July 6, 2004.
[7/3/04] We’re back to square one, with a resumption of the furious debate over where the market should head next. Much of the debate centers on disagreement over where the economy will be heading in six to nine months, especially with high oil prices and the unfolding Fed interest rate hike campaign on the one side and improving economic and business fundamentals on the other side of the equation.
Meanwhile, traders and short-term speculators appear to be intent on ‘testing’ the Nasdaq May low of 1,865.40, which would ‘confirm’ an intermediate-term bear market trend if we go much lower than that low. We are now 50 points above the May low, but we remain in a condition where “anything could happen.” We need to wait a while to verify whether the decline was due to ‘real’ selling or simply shorting by speculators which has artificially and temporarily pushed down the market. Ditto for the recent advance; it may be real and sustainable or simply be due to short-term speculation. It could take a month to see a firm resolution to the market trend.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +5.02 on Tuesday, very slightly above the midpoint of my range of -40 to +50.
[8/9/04] Since Nasdaq has broken down below the May, April, and October lows, there is no telling how far the market might drop. It all depends on whether any significant real buying or selling materializes. In the absence of any significant real selling, the market will bounce even without any significant real buying, but stay in a downwards sloping channel. If we do see any significant real selling, then the downward trend will continue. But if we start to see more real buying, the correction will be at an end. Ultimately, in the absence of significant real buying or selling, technical traders will keep the market bouncing up and down in a flat range.
[5/11/04] Technically, we just (barely) confirmed a new bear market within the current bull market since Nasdaq established a “lower low” (below the March 24 low) more than three months after the most recent market high (in January). That’s enough to meet my basic definition of a bear market (lower highs and lower lows for more than three months). But, because the new low is so close to the prior low and we saw a significant intra-day bounce, we have the possibility that we might be seeing a classic “double bottom”, which would be a bullish sign. Note that it is possible to nest any number of bull and bear markets, each at a longer or shorter timescale. This new “mini” bear is nested within the bull that started in October 2002, which is nested within the bear that started in March 2000, which is nested within the long-term, secular bull market.
[8/14/04] Technically, we have once again confirmed the intermediate bear market trend within the current overall bull market since Nasdaq established another ‘lower low’ below the October 2003 low without establishing a ‘higher high’.
[8/28/04] Two weeks have passed since that most recent low. Although superficially that suggests that the correction is over, the market never moves in a straight line, so the current bounce may simply be a temporary phenomenon before the decline continues. We will know for sure that the correction is over if we start breaking out above previous levels of resistance, such as the May low at 1,865.
[9/11/04] We’ll need to see Nasdaq break above the April low before we can even contemplate that the recent mini-bear market might be over. Actually, we need to wait a full three months from the start of the recent advance before we can speak with confidence of the mini-bear being over. And technically, we would need to break out solidly above the January peak as well. Meanwhile, we can only mark the milestones as we go.
The confirmed bull market for Nasdaq that began on October 9, 2002 (and was confirmed on June 16, 2003) is now 479 days (1 year and 233 days) old and 160 days off its closing peak of 2,153.83 on January 26, 2004. The intra-day high was 2,153.83 on January 26, 2004. That closing peak is also the current 52-week closing high.
[7/31/04] Nasdaq ended July at 1,887.36 with a 7.83% decline (-160.43 points) from the June ending level of 2,047.79. I would say that there is a 70% chance that Nasdaq will close August higher than July and a 30% chance that Nasdaq will close lower. Nasdaq could finish 15% lower or 25% higher (midpoint of 5% higher).
[9/1/04] Nasdaq ended August at 1,838.10 with a 2.61% decline (-49.26 points) from the July ending level of 1,887.36. I would say that there is a 70% chance that Nasdaq will close September higher than August and a 30% chance that Nasdaq will close lower. Nasdaq could finish 15% lower or 25% higher (midpoint of 5% higher).
[8/28/04] We are still in a correction off the intra-day peak of 2,153.83 on January 26, 2004. The intra-day low to-date for this correction was 1,750.82 on Friday, August 13, 2004, a decline of 403.01 points or 18.71%. That is a moderately sharp correction. We remain in this correction until we get confirmation of a new up-leg and set a new 52-week closing high above the 52-week intra-day peak. I have a suspicion that there are more than a few technical speculators who consider a 15% decline as the ‘magic’ reentry level for continuing a bull market advance after a correction. But that would depend on seeing some real buying materialize, otherwise speculators will see the 15% decline as yet another nail in the coffin of the prior advance. For now, technical speculators will focus on trying to push Nasdaq to a 20% decline off the January peak, the semi-official boundary for a “bear market”. They may take an indirect approach by letting the market rise a little to attract a higher volume of fair-weather speculators and then reversing sharply again to put more fear into weak-willed market participants and attract even more opportunistic short-sellers to strengthen the selling pressure. That’s a classic technique for market manipulation and should be illegal, but it’s all done informally and indirectly and with no overt coordination (just lots of ‘chatter’) so no culpable parties can ever be identified.
The confirmed up-leg for Nasdaq that began with the intraday low of 1,253.22 on March 12, 2003 is now 376 days (1 year and 128 days) old and 160 days off its closing peak.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, August 8, 2003 with an intra-day low of 1,640.88 is now 276 days (1 year and 26 days) old and 160 days off its closing peak. This is a minor leg nested within the larger leg that started on March 12, 2003 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, August 13, 2004 with an intra-day low of 1,750.82 is now 22 days old and at its closing peak of 1,915.40 on Tuesday, September 13. It is 1 day off its intra-day peak for this up-leg (1,919.21 on Monday, September 13). It’s a clear yellow flag that we set a new closing high but didn’t close above the previous intra-day peak. That needs to be rectified ASAP, otherwise Nasdaq will likely rollover and head back down. I wouldn’t get too excited about this leg until we stay at least 1% above the 1,865 level for at least a week, and then move 1% higher than that and stay there for a week. It’s too soon to conclude that this leg is back into a sustainable advance, but things are looking up. Unfortunately, it’s not uncommon for an up-leg to stagnate and then show a strong up-burst before finally (and suddenly) heading down to a new low. I’d want to see Nasdaq stay above 1900 for at least another 9 days and see Nasdaq close above the 1975 level before declaring that the 1900 level is safely behind us.
[8/7/04] Even if we do get confirmation of the new up-leg, that does not mean that we are automatically out of bear-market territory. Since we did establish a new low below the October 2003 and March and May 2004 lows we would need to see a 1% gain above the June and the April peaks before people will begin to concede that we really are out of bear-market mode. And finally, we would have to close more than 1% above the January peak and stay up there for at least three months before people will be forced to concede that this is at least a cyclical bull market again.
[9/10/04] The big wildcard remains stock mutual fund money flows, which have been a net negative for many recent weeks, but did turn moderately positive in the most recent week. One week does not establish a change in trend, but it is a good sign.
[1/6/04] Click here for Market Outlook for 2004.
[8/23/04] Clearly the elevated price of crude oil has to have some negative impact on the economy, but the big question is how much impact. Overall, the economy is less sensitive to the price of oil and “oil shocks” than in past decades, but some sectors (such as airlines and chemical companies) are significantly more sensitive, whereas most sectors are only modestly sensitive. The current price escalation in fact has not been caused by any supply shortage or any excess demand by end users, but is merely due to a dramatic level of speculation in crude futures. The bad news is that we don’t know how much longer that speculative ‘bubble’ will continue to grow. The good news is that oil at these prices is not as attractive an ‘investment’, so the speculation will be increasingly susceptible to profit-taking and renewed interest in short-selling. Besides, if oil really were expected to rise dramatically from here, we’d see it in the price of futures in coming years, and we don’t. In fact, futures ‘predict’ that the price of crude will decline in coming years. In any case, elevated oil prices will be a moderate drag on the economy, but not so much as to spur accelerating inflation or to trigger a recession. Maybe it will trim a quarter to half-point off GDP, but that’s about it. Besides, people and businesses will adjust their lives and operations to further reduce their dependence on expensive oil. And finally, high-efficiency hybrid-electric vehicles are beginning to debut and anxiety over the price of gasoline will simply accelerate the development and introduction of such innovative products, which will dramatically moderate the demand for oil a few years from now.
[8/7/04] The latest economic data continues to support the thesis that the U.S. economy is solidly into a gradual, zigzag, underappreciated, stealth recovery. It will be another two years before the economy is fully back on track. Unemployment will decline only gradually. The bankruptcy rate will decline off recent highs, but remain at a fairly high level for another two years. There are still quite a number of businesses (and entire sectors) that will need to be restructured over the next two years as well.
[7/3/04] A major uncertainty is the state of the economy in Q4 and the first half of 2005. We currently have enough momentum to do well in the current quarter (Q3), but nobody really has even a halfway decent handle on how that momentum will play out towards the end of the year and into next year. We have the looming specter of rising interest rates, but the Fed would certainly back off if the economy started to sputter. The bottom line is that the economy is likely to be doing “okay”, but probably not a lot better than “okay”, in Q4 and early 2005.
[7/6/04] Some people are protesting that company profits could suffer as companies run out of costs that they can cut. That’s complete nonsense. First, companies will never run out of costs to cut. But more importantly, one of the factors that has been holding back growth of business revenues (and profits) over the past three years is the fact that companies have been dramatically cutting costs and the cutting of a cost for one company is the cutting of the revenue of one or more other companies. That cost-cutting binge was exerting a distinct headwind on businesses, but that headwind will in fact fall off as the cost-cutting moderates. And as revenues begin to grow more strongly, companies will begin to reverse the process and both spend more and hire more workers. Continued technological advances will spur further cost-cutting, but on a more moderate basis.
[3/13/04] A major uncertainty that will begin to loom over the economy and the financial markets is the impact of the outcome of the Presidential election. Although the political rhetoric can get very intense, the fairly even split in Congress makes it very unlikely that either party in the White House will be able to dramatically change federal economic policy significantly over the next four years. Besides, both parties are interested in reducing the federal budget deficit. The proposals from both parties will be hotly debated, but I can’t see that either side is either a clear winner or a clear loser for the economy and the markets.
[12/29/03] 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.
[12/29/03] A big wildcard in 2004 will be the possibility of a new wave of corporate cost-cutting as companies burn through the easy part of revenue growth and are forced to revert to cost-cutting to keep up earnings growth. The problem is that one company’s cost is another company’s revenue or an employee’s income, so more cost-cutting can boost earnings in the near-term but risk putting intense downwards pressure on business spending and employment. This cost-cutting process will moderate once companies begin to build up a deep enough backlog of unfilled orders so that they can keep revenue growth at a consistently strong pace to keep earnings growth up. The economy will survive this process, but the zigging and zagging of the pace of the recovery will continue.
[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: September 14, 2004 10:23:21 PM -0400
Copyright © 2004 John W. Krupansky d/b/a Base Technology
