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(Updated since Saturday -- changes marked with [ * ])
Despite all the chatter about various news items, the moderate 10.95-point Nasdaq decline on Friday was mostly technical in nature, with the market being heavily overbought on a near-term technical basis after the recent run-up and being prone to profit-taking. Lingering after-effects of the Fed FOMC announcement also dog the market. Modest outflows of money from stock mutual funds over the past two weeks have also been a drag on the market.
Nasdaq trading volume was very heavy (2.52 billion shares), but breadth was only very slightly negative. We're still experiencing a "rip-tide" market, with a fair amount of selling into the rallies, even as other people are looking to deepen their market positions.
The Consumer Price Index (CPI) report for November registered a modest rise in consumer prices (+0.2% vs. +0.6% last month), and a modest rise ex food and energy (“core” inflation, +0.2% vs. +0.2% last month). This was a reasonably positive report, with no evidence of either accelerating inflation or accelerating deflation. A little inflation is a good thing, encouraging people to spend money rather than simply hoard it..
The ECRI Weekly Leading Index registered a moderate rise (+0.6 vs. +0.6 last week) to its highest level since mid-April, and the six-month smoothed growth rate rose modestly (+0.3 vs. +0.2 last week) and remains modestly above neutral (for 4 consecutive weeks after 12 consecutive weeks below neutral) and at its highest level since late July. This was a positive report, and suggests that the economy will continue to limp along for the next few months, neither booming nor busting. We're basically still in a "watching paint dry" economy as we wait for ongoing business restructuring to progress, but the WLI is beginning to "hint" that the economy is starting to re-accelerate..
The AAA Daily Fuel Gauge Report registered a moderate decline of -0.4 cents since Wednesday (from 1.822 to 1.818). Regular unleaded gasoline is now 13.9 cents below the level of a month ago, and 23.6 cents below its May peak. Please note that gasoline prices will lag changes in crude prices, possibly by as much as several weeks.
[ * ] Saturday: The weekly Wal-Mart (WMT) Sales Outlook was on track to meet the monthly forecast of 1-3% year-over-year growth for December . This was a mixed report. The company said it continued to see strength in food sales, while general merchandise sales improved as the week progressed. They said that sales of winter-related items also improved, and sales of gift cards were up significantly over last year. They also said that customer traffic drove sales in the week. Nonetheless, sales growth remains weak relative to last year.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a very sharp decline (more than 10 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended December 17th. This was a positive report.
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[12/02/04] Yet another day has passed without ANY significant evidence of the much-discussed "dollar crisis" taking root. I would have expected the dollar to have fallen to 1.35 euros by now, simply as a result of normal speculation, so clearly the sky is not falling, despite the intense chatter.
[12/13/04] We could well see a trading-range bounce in commodity prices, but that could be temporary as well.
[12/8/04] The "recovery" of the dollar may in fact simply be a short-term correction, but it's also possible that we could see the dollar revert to bouncing within a trading range.
[12/8/04] It is also possible that commodities speculators are rotating out of the dollar and gold, which are looking rather overbought, and into crude oil, which is looking somewhat oversold on a short-term technical basis.
[11/13/04] Crude Oil futures continue to be whipsawed by speculators. Traders and speculators are pausing to regroup and figure out if the next big move is up or down. Crude futures may once again be poised to resume their run at $60, but this could once again be a ruse to attract naive long positions that the shorts will then be poised to clobber. Crude oil will be susceptible to sharp moves in either direction, for the next couple of months, until the Fed raises interest rates enough to dampen the attraction of hedge fund speculation in commodities.
[11/13/04] The Dollar appears to be poised to continue declining, but that could also be a ruse to attract naive long positions that the shorts will then be prepared to clobber. Although there may be longer-term pressure for the dollar to cheapen, excessive volatility will remain the norm until the Fed raises interest rates enough to dampen the appeal of foreign exchange speculation. It's normal for there to be a fair amount of profit-taking as the dollar approaches a major support level such as 1.30 to the euro. The dollar will probably soon fall through the 1.30 level and then quickly run down to the 1.35 level, but is unlikely to run down as far as 1.40. On the other hand, a little bit of good economic data (or commentary by the Fed) could cause the dollar-shorts to cover their short positions and once again send the dollar bouncing towards the other edge of its trading range
[12/11/04] Gold futures may be in a new trading range after a big leap upwards followed by significant profit-taking. Gold may correct further to establish an even lower bound for the range, or begin to creep higher. It could move back above $450, but probably not by a lot, yet.
There was a moderate rise in the odds of rate hikes in the May through August timeframe. There is significant confusion about whether a hike might be likely at the March FOMC meeting. To me, it all depends on the strength of the economy at that time.
[12/6/04] A Reuters poll shows that all 20 of the primary treasury dealers expect a quarter-point rate hike at the December FOMC meeting and 16 of the 20 expect another quarter-point hike at the FOMC meeting in February.
[12/18/04] The fed funds futures market suggests a quarter-point hike (to 2.50%) at the February 1/2 FOMC meeting, no hike at the March 22 FOMC meeting, a quarter-point hike (to 2.75%) at the May 3 FOMC meeting, a quarter-point hike (to 3.00%) at the June 29/30 FOMC meeting, and a quarter-point hike (to 3.25%) at the August 9 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.
[12/16/04] There would be very little benefit for the Fed to pause at this point in time, especially since the pause would force everybody to second guess the Fed and actually conclude that the Fed paused because they were worried that the economy was deteriorating. My current thinking is that the Fed will maintain quarter-point hikes at each FOMC meeting until they get somewhere in the 2.50% to 3.25% range and then pause until unemployment starts to fall off more significantly, and then resume hikes until a neutral rate is reached.
[12/16/04] The Fed is not likely to quickly raise interest rates all the way to a so-called ‘neutral’ stance (somewhere in the 3.5-4.5% 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 2.50% to 3.25% 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.
American Express (AXP) will be cutting 2,000 jobs, although not all of those will be in the U.S..
[10/21/04] I attended the VentureOne Exchange venture capital conference up in Boston on Tuesday, October 19 and Wednesday, October 20. Click here for my write-up of last year's conference.
[10/21/04] I'll have a write-up on the conference soon, but the simple summary is that venture investment is making a painfully slow comeback. It is coming back, but at a very slow pace. Even worse, companies are raising less money and hence hiring less (or hiring offshore) and spending less. The net effect is that current venture investment is only a very modest boost for the economy, and a much smaller boost than it could be.
[10/11/04] For some background information on venture capital, click here.
[12/8/04] My next dollar-cost averaged investment will occur on Tuesday, January 4, 2005.
[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.
[12/6/04] All bets are off as to the short-term trend. We could see a continuation of the sharp run-up, an equally sharp decline, or anything in between. The likely scenario is for more gains, but higher volatility is also likely.
[12/2/04] A moderate amount of profit-taking would not be a big surprise due to the out-size gain on Wednesday, but we could also see another spike if speculators jump the gun again and place too many bets on a pullback and end up causing a continuation of the short squeeze.
[12/2/04] Although the market has been rather erratic on a near-term technical basis due to being overbought (on a technical basis), the unresolved question that will really determine the market trend is how money flows for mutual funds will trend in the coming months. Recently, money flows have been erratic, but basically maintaining an upward trend.
[11/30/04] Although Nasdaq is still looking overbought on a short-term technical basis, and hence susceptible to a decline, short-sellers continue to make bad premature bets on a decline and are then forced to cover.
[11/26/04] The market could react to all the mindless chatter about an imagined "dollar crisis", or it may dip and then bounce, or maybe the market will ignore the mindless chatter of forex speculators and continue the recent advance. In any case, true investors should ignore all the chatter about the so-called "dollar crisis".
[11/26/04] Rumors about preliminary post-Thanksgiving retail sales could also filter into the market.
[11/8/04] The market is very clearly heavily overbought on a near-term technical basis, which means that it is quite susceptible to significant profit-taking. The good news is that there are plenty of people who seem committed to the thesis that November through February is the most profitable period to own stocks. The other good news is that any significant correction at this stage would simply be treated as a buying opportunity and lead to further gains in the months ahead.
[12/13/04] Click here for Market Outlook for 2004.
[12/13/04] Click here for Market Outlook for 2005.
[12/16/04] Nasdaq set a new near-term closing peak of 2,162.55 on Wednesday, December 15, 2004. This is a positive sign, except for the fact that we still haven't closed above the prior recent intra-day peaks, as well as the fact that Nasdaq closed almost 9 points below its new near-term intra-day peak.
[12/16/04] The new Nasdaq near-term closing peak is also a closing high for the year and a 52-week closing high as well as the closing high for the advance that started in October 2002. In fact, it's the highest Nasdaq closing level since the close of 2,169.95 on June 12, 2001.
[12/15/04] Although the setting of that new high is a good sign, it's possible that it may have been due merely to the volatility that we tend to see on the day of an FOMC announcement, so I'd wait a couple more days before celebrating too heavily.
[12/16/04] Nasdaq set another near-term intra-day peak at 2,171.27 on Wednesday, December 15, 2004, but failed to close even close to it. This is another obstacle that Nasdaq will have to hurdle in the near future to maintain momentum.
[12/15/04] Nasdaq set another near-term intra-day peak at 2,163.50 on Tuesday, December 14, 2004. This was not a higher near-term peak, but was higher than the near term closing peak, and hence another obstacle that Nasdaq will have to hurdle in the near future to maintain momentum.
[12/16/04] One piece of good news is that Nasdaq did manage to close above one of the recent intra-day peaks, the 2,161.30 level of Tuesday, December 7, 2004. This is one less obstacle that Nasdaq will have to hurdle in the near future to maintain momentum.
[12/16/04] Nasdaq has retraced all of its recent correction and we've confirmed a near-term bullish trend (a higher high) Although that closing peak was the milestone in our face, we really need to close above the recent intra-day peaks of 2,164.63 on Friday, December 3, 2004 and 2,171.27 on Wednesday, December 15, 2004 to truly confirm the bullish trend of "higher highs".
The heavy trading volume over the past twelve sessions coupled with no real progress is very suggestive of a potential market top. The bad news is that this could lead to a significant sell-off. The good news is that quite a number of short-sellers may already have gotten sucked in by the lure of this top, and be forced to cover those short positions as the selling pressure quickly peters out.
[12/4/04] Nasdaq set a new near-term intra-day peak of 2,164.63 on Friday, December 3, 2004, but closed 14.67 points below that level. It is a positive sign that Nasdaq managed to set such a new intra-day peak, but a negative sign and clear yellow flag to close so far below it. It's also a yellow flag that Nasdaq has failed to close above the other recent intra-day peak of 2,156.14 on Thursday, December 2, 2004.
[12/15/04] The next big Nasdaq milestones in front of us will be the psychological 2,200 level, the June 7, 2001 closing level of 2,264.00, the psychological 2,200 and 2,250 levels, the May 22, 2001 closing level of 2,313.85 and intra-day peak of 2,328.05, then a long uphill slog to the January 24, 2001 closing high of 2,859.15 and the intra-day peak of 2,892.36, with intermediate psychological milestones of 2,300, 2,400, 2,500, 2,600, 2,700, and 2,800. Some older levels of resistance are the 2,505.89 closing level of January 29, 1999, the 2,533.44 intra-day peak of February 1, 1999, the 2,598.10 closing level of April 12, 1999, the 2,632.51 intra-day peak of April 13, 1999, the 2,652.05 closing level of April 26, 1999, and the 2,677.76 intra-day peak of April 27, 1999.
[12/18/04] Short-term (1-day): Very volatile, but moderately bearish.
[12/18//04] Short-term (2-day): Very volatile, but moderately sharply bearish.
[12/17//04] Short-term (5-day): Very volatile, but modestly bullish.
[12/18//04] Short-term (10-day): Very volatile, but very modestly bearish.
[12/18//04] Short-term (1-month): Somewhat volatile, but modestly bullish.
[11/6/04] Short-term (2-months): Somewhat volatile, but moderately strongly bullish.
[11/24/04] Medium-term (3-months): Somewhat volatile, but moderately strongly bullish.
[12/4/04] Medium-term (6-months): Very Volatile, but moderately bullish.
[12/18//04] Medium-term (9-months): Very Volatile, but moderately bullish.
[11/19/04] Year-to-Date: Very Volatile, but modestly bullish.
[11/6/04] Longer-term (1-year): Very Volatile, but modestly bullish.
[10/15/04] Longer-term (2-years): Moderately strongly bullish.
[10/15/04] Longer-term (3-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (4-years): Very volatile, but moderately bearish.
[12/16/04] Longer-term (5-years): Very volatile, but moderately bearish.
[10/15/04] Longer-term (6-years): Very volatile, trading range.
[10/15/04] Longer-term (7-years): Very volatile, but slightly bullish.
[10/15/04] Longer-term (8-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (9-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (10-years): Very volatile, but modestly bullish.
[10/15/04] Overall outlook: confused and volatile, but with a modest upwards trend. The economy is neither "booming" nor "busting", but making modestly positive progress at restructuring problematic industries.
[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.
[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: December 20, 2004 12:17:33 AM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology