| Read Jack's "diary" of life in Washington, DC after the terrorist attack. Click here. |
One of the ways that individual investors have of competing with the pros on Wall Street is the fact that we don't have to make money every hour of every day of every week of every month of every year. We can afford to wait out the little storms that frequently buffet the market. The pros can't afford to do that. Either they show a profit or their boss shows them the door. The result is that they have to treat every negative news blip like it was the end of the world. The individual investor has the luxury of letting the dust settle and then making a calm, dispassionate decision based on the true facts and not just on preliminary rumors. The plane crash near Kennedy airport last month was a great example. The allegedly "new" bin Laden tape yesterday might be another. The market may have declined as knee-jerk traders may have dumped stocks thinking that the "new" tape indicated that bin Laden may have survived the bombing. Right now, nobody knows if this tape is actually new. It's the LATEST tape, but it may well have been taped before the Tora Bora bombing campaign. The pros on Wall Street have to react instantly. We don't. We can wait for the facts, or even buy the dip. The pros have their own games and rules. It's unwise to try to play their games by their rules. The market is there for everyone. In fact we each get to define our own games and our own rules. Long-term buy-and-hold investing really is one of the best games that the pros simply can't even come close to competing with. The best they can do is to try to get you to switch into short-term mode and then they have a shot of scaring into selling at the worst times or using greed to get you to buy at the worst times.
My own personal belief is that we simply do not know or have a strong belief one way or another whether bin Laden is dead or alive or where he might be if alive. That's what I THINK the underlying market also understands. The knee-jerk reaction to the news of the tape was just a typical Wall Street game.
That said, it's not at all clear that the profit-taking that started at 3:00 p.m. was really directly related to the bin Laden tape or merely the typical end-of-day profit-taking we see when a large portion of the day's rise was due to momentum day traders who jumped aboard in the morning and then have no choice but to sell to get out by the end of the day. One of their goals is to not be exposed to the market (or potentially adverse news) outside of normal trading hours. In other words, they stay in cash except when they can see the market right in front of their faces. My suspicion is that less than a third of the pullback was actual concern about bin Laden.
My other reason for suspecting that yesterday's initial gain was mostly day-trading was that it occurred so quickly, by 10:30 a.m. REAL buying tends to build up gradually over several hours.
Yet another reason for discounting bin Laden as the primary culprit is that Nasdaq peaked just before noon and had trended down for three hours before the bin Laden news.
All things considered, yesterday was a typical, relatively slow holiday-week market. Still, we did get and hold onto a nice gain. The optimism was due to better-than-expected reports about holiday retail sales.
The Redbook Retail Sales Average fell 4.5% for the three weeks ended December 22 compared to the same period last month. But the year over year decline was only 0.6%. Note that the reporting period did not include the day before Christmas nor the Thanksgiving shopping weekend.
The Bank of Tokyo-Mitsubishi(BTM)/UBS Warburg weekly chain store sales index rose 2.9% for the week ended December 22 compared to a 0.5% drop the week before.
TeleCheck Services reported that same-store sale in the 32 days following Thanksgiving rose 2.2% over last year. This report covers 27,000 locations and is limited to payments made using checks. Given the various differing metrics for measuring retail sales, it's no surprise that the media and consumers and stock analysts and investors and politicians and economists get so easily confused over what's going on in the economy.
Wal-Mart (WMT) reported being ABOVE plan for the holiday shopping period.
Yahoo (YHOO) reported strong growth in its online shopping services.
Jim Cramer is actually BULLISH on Amazon (AMZN). He likes the fact that they weren't discounting prices during this holiday season. People are buying through Amazon even though prices are higher than elsewhere. Amazon stock also gained some interest on the Yahoo news.
Microsoft (MSFT) announced a 106% gain in revenue at their MSN eSoft internet shopping service.
If you look at individual stocks, you see wildly divergent performance yesterday. It was not the kind of "clean" rally day I like to see where most if not all of the top stocks have comparable gains. But, for now, I'll take the gain.
Nasdaq has now closed above its 100-day moving average for 30 days straight and above its 200-day moving average for 3 days. The 50-day moving average continues to rise, but is flattening a little. The 100-day moving average is almost flat and the 50-day moving average recently crossed above it; this sometimes suggests that a rally could be imminent. The 200-day moving average is also starting to flatten out. This is all setting up for a strong rally, sometime soon. Some pros use the 50-day moving average crossing the 200-day moving average as the rally trigger. That may be a week or two away. Incidentally, on only 10 days of the Fall rally has Nasdaq closed above the current level. That's a good sign.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 1.38% on Wednesday to 22.89, which is almost down to the middle of the moderate anxiety zone (20 to 25). People are fairly comfortable with the risk in the market.
The Nasdaq-100 After Hours Indicator held a positive bias for the entire Wednesday evening session, closing up 2.93 points. No major tech warnings, imagine that. Maybe the worst really is behind us. But the market must do its thing and act as if danger lurks right around the corner.
After the close: The weekly ABC/Money Magazine Consumer Comfort Index fell to -11 (out of a range from -100 to +100) from -6 last week. This is a negative report. Consumers are heavily influenced by the media, so the news that the fiscal stimulus plan was DOA this year probably weighed heavily on consumer attitudes. The near-term weakness in the stock market probably also weighed on their minds. Consumers feel more uncomfortable with both the national economy and their own finances. This index adds up those discomforts, so the actual decline in the individual components was reasonably small. I'm not too worried about this one weekly decline, unless a significant trend develops. If the index hasn't improved substantially within a month, then we can start worrying.
Fed Funds Futures suggest a 26% (unchanged) chance of a quarter-point cut in interest rates at the January 30 FOMC meeting. In other words, another rate cut is UNLIKELY unless the economy does worse than looks likely. I believe the Fed's rate-cutting campaign is over. And given the tentative state of the economy, it's unlikely that interest rates will start to rise until the Summer or Fall.
A new capital gains tax law provision went into effect this year. Gains on stocks purchased this year and held for five years or more will be taxed at a lower 18% tax rate when sold. In addition, if you are holding stocks purchased before this year, you can switch older stocks to the new "plan" by filing a special election and paying tax this year on any gain, but paying a lower tax rate on the future gains if you hold for another five years. It's a little more complicated than that, but a good tax accountant can guide you through the maze. This is really good news for all of us long-term, buy-and-hold investors. But here's an additional piece of tax advice from my accountant: Don't let the tax tail wag the investment dog. In other words, if you sincerely think it's time to get out of a stock (think Enron (ENE) earlier this year), by all means get out regardless of the tax consequences. That said, there are plenty of advantages to picking stocks that you intend to hold for the long haul.
I found this really cool web site that gives you a view into the world of institutional trading. It's called I-Watch and run by Thomson Financial (the people who own First Call). It's at http://iw.thomsonfn.com/iwatch, and you can enter a stock symbol or view the most active sectors or industries. It shows you the rough supply versus demand for the interest in stock or sectors based on the messages that institutional traders send on their trading network. They use a radically different trading system from the online systems we individual investors use. Take your favorite stock and see what the institutions are up to when your stock rises and falls. You can use it before the market opens as well.
The Wall Street game du jure is to hold your breath and cause yourself as much pain as possible while waiting for additional tech warnings. As usual, you don't have to play any of Wall Street's games unless you want to.
Unless there's significant bad news, the market should tend to rally a bit more in the near-term.
The bottom line: The new bull market (3 months, 1 week, and 1 day old) continues. I don't expect much of an additional dip until after we've rallied well above 2100.
Short-term economic outlook: The trough for the recession was probably the second half of October and the economy has slightly improved since, even if not yet noticeable by economists (they won't have a handle on November until January). As December and January progress we will gradually start to see more incremental signs that the economy is beginning to recover. Not a large improvement, but at least the trend will not be downward. Some indicators will continue to decline, even as others begin to stabilize and some even begin rising. But, October and the first half of November were probably bad enough that Q4 will "print" as a decline in GDP. Employment will continue to fall until GDP finally breaks above the rate of productivity growth, probably late in Q1 of 2002. The manufacturing sector won't trend up from a trough until sometime in Q1.
My tech stock "safe" signal is still stuck at 0.0 since none of the major tech companies is yet publicly claiming that they have evidence (other than "hope" or "hints") that their business has started to accelerate out of the tech downturn. My "safe" signal requires at least 20% or 1 out of 5 of the top 25 tech companies to signal acceleration. Expect at least two quarters to elapse from the time of the first indications of an upturn and the return of solid growth. The theory is that the stock market should begin a sustainable rally six months in advance of the return of strong growth. Despite recent events, I continue to peg Q2 (May or June) of 2002 as the timeframe for the return of relatively strong growth for the bulk of the tech sector.
Jack Krupansky
Updated: December 27, 2001 12:40:13 AM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology