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That was a nice bounce on Wednesday, but can mostly be chalked up to short-covering. We did have a little bit of good news, but not enough to get really excited about, yet. Basically, the market rallied from a technically deeply-oversold position. That doesn’t mean we’re back in a bull market, yet.
Volume was light (1.68 billion shares). Breadth was good, with 1.87 gainers for each loser.
The weekly Mortgage Bankers Association (MBA) Mortgage Applications Survey registered a moderate gain, with a modest gain in applications to purchase and a moderate gain in refinancing. This was a positive report.
The Existing Home Sales report for August registered a modest decline. This was a slightly negative report, but there tends to be a fair amount of monthly volatility. Demand for housing is still quite strong. Note that this report covers existing homes only, and not new homes.
The Monthly Mass Layoffs report for August registered a sharp drop in announced layoffs. This was a positive report, but August historically shows a decline in layoffs anyway. The good news is that the report wasn’t worse.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 6.54% on Wednesday to 42.41, which is just below the midpoint of the extremely high anxiety zone (40 to 45). The rally was a relief, but the market is still too deep in the hole for people to gain more than a little comfort. VIX is still elevated enough to provide a contrarian bullish signal.
The Nasdaq-100 After Hours Indicator had a positive tone for the Wednesday evening session, closing up 3.25 points. I could not find any news to account for the nice gain, especially coming on the heels of a strong short-covering rally.
HP (HPQ) reports a new round of additional job cuts. It’s always depressing when good people lose their jobs, but it is also a sign that the company is serious about restructuring itself to be positioned for profitable growth as the economy picks up.
Fed funds futures suggest a 70% (down from 75%) chance of a quarter-point rate cut in November. In other words, futures indicate that the Fed will cut rates at the November 6 FOMC meeting.
December is still too far away for futures to reliably predict the actual fed funds rate (according to studies that the Fed itself has done.)
[UPDATED 9/25/02] I forecast that the Fed will hold interest rates steady through the Fall election (November 5) and likely through the November 6 FOMC meeting as well, unless some dramatic, new, unforeseen crisis erupts.
The dollar fell modestly against the yen and rose moderately against the euro.
[UPDATED 7/23/02] There are still no signs of any economic fundamentals that would make either Europe or Japan dramatically more attractive than the U.S. for long-term investment. Rather, the relative weakening of the dollar has been primarily driven by speculative currency trading and sentiment (such as the accounting scandals) and that sentiment will most likely reverse over the coming months as the forces depressing sentiment dissipate.
In any case, the dollar is still quite sound and no true investor should lose any sleep worrying about potential negative implications from a weaker dollar. And, a weaker dollar will boost U.S. exports.
The price of oil fell modestly, but is still modestly above the psychological $30 level. Although Iraq remains the main ‘culprit’ for high oil prices, tropical storm Isadore is adding a definite premium to oil prices as the storm has caused the shutdown of oil production and refining along the Gulf Coast.
A fair amount of the current price of oil is temporary and psychological and will dissipate as people realize how much oil is really sloshing around the system.
Also, people in the U.S. Northeast are in the process of loading up on heating oil in preparation for the first chilly days of autumn. That gooses demand as there is a shift from gasoline for the summer vacation period to the fall and winter heating period.
In any case, the price of oil price continues to be well-behaved and no true investor should lose any sleep worrying about it.
The price of gold fell sharply as the stock markets rallied.
In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
The relative calm continues.
The U.S. will be sending a high-level envoy to North Korea to discuss missile and weapons concerns. This is a good sign, but nobody is expecting any breakthroughs, yet. North Korea may simply be trying to buy time.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The eerie calm continues.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The war of words continues, now mostly between the Republicans and Democrats in Congress as they struggle to cope with President Bush’s proposed resolution. The U.S. may present a proposed UN resolution to the Security Council as early as Friday. Then they have to deal with the response of France, Russia, and China.
There are probably lots of behind the scenes preparations and planning going on, even if publicly there doesn’t seem to be much progress.
[UPDATED 9/16/02] The bottom line is that investor concern over the sluggish economic recovery and weakness in corporate revenue and earnings growth still weigh more heavily on the market than all the other non-economic factors. Traders merely use Iraq, et al as excuses for any market weakness.
Click here for our more extensive commentary on The Iraq Problem.
Click here for our more extensive commentary on Technology.
No activity, but a decision will come out sometime in the coming weeks or month or two.
[UPDATED 8/5/02] Check out our book list.
Absolutely nothing more is needed at this point other than to simply let the current market-driven corrective processes play themselves out.
Click here for our more extensive commentary on financial reform.
Click here for our more extensive commentary on The Telecom Problem.
…
No activity.
Everyone is anxious to see if Nasdaq in fact established a new low on Tuesday. Tuesday was basically flat after opening down sharply, so we effectively have two days of rally behind us.
The market is still in a technically deep-oversold position, so traders could rally a lot more before getting nervous.
There are only three more business days in Q3, so companies should have a fairly good idea about whether they will meet, miss, or exceed Q3 expectations. I would have thought we would have seen more warnings by now, but we have a good two weeks before it will be safe to assume that most of the Q3 warnings are behind us. Q3 wasn’t a great quarter, but data so far suggests that it wasn’t anywhere near as bad as the cynics had lead us to believe.
The weekly unemployment claims report comes out this morning. It will be interesting to see if we start to see a stabilization pattern or further deterioration. There tends to be a lot of summer seasonal employment that goes away in early September. Likewise, there tends to be some school-related employment that usually gains by mid-September. Also, there are a lot of higher-end un-employees who are taking lower-end jobs out of desperation since their formerly-cushy jobs have evaporated out from under them.
My forecast for today is that Nasdaq will close in the range -40 to +80. Nasdaq came in at +40 on Wednesday, slightly above the midpoint of my range of -30 to +80. The market continues to be so crazy that it could go either way, but I still believe there is a longer-term upwards bias even if the near-term bias is all over the map.
[UPDATED 9/25/02] Technically, we are back in a bear market (as of Monday) since we have broken below the July 24 low. But whether we continue downwards depends on whether the recent declines were driven by ‘real’ selling or simply due to short-selling. Short-sellers do eventually have to buy their borrowed shares back. The lofty level of the market Volatility Index (VIX) suggests that professional investors are bracing for the worst. That sounds bad, but frequently, those precautions are a harbinger of a turn in the market. The only question is whether the turn occurs within the next few days, a few weeks or a few months.
[UPDATED 8/22/02] The incredible level of disbelief in the current rally strongly suggests that a contrarian bullish view may be appropriate. It’s the exact flip-side of where we were in April and May of 2000 when people refused to belief that the bull market was over and that a bear market had begun.
[UPDATED 6/24/02] Regardless of how crazy the market behaves, the economic recovery is well underway. Market participants may not yet be ready to acknowledge the recovery, but it is inevitable, even if the timing is uncertain. There are more than enough differences in the current market cycle than any in recent memory, but inevitably the market will rise as people anticipate earnings growth down the road. Investing for the long term is still an excellent strategy even if it feels painful in the near term.
[UPDATED 6/24/02] The market will rally when the selling peters out. The market religiously obeys the law of supply and demand, but many buyers have a habit of waiting until the sellers exhaust themselves.
[UPDATED 9/14/02] I’ve decreased my estimate of the probability of a double-dip recession to 20% (from 25%) due to higher retail sales in August. I still think a double-dip is unlikely, but I do want to quantify my beliefs as well as risks.
[UPDATED 6/24/02] There is absolutely no question that the economic recovery in the U.S. is going at a somewhat slower pace than had been expected by this point in time, but the recovery is well along nonetheless. We are still winding our way through an extended turning point, but virtually every day brings news that we are making incremental progress, even as there are still plenty of negative data points as well. Impatient observers fail to recognize that turning points are bumpy affairs and that negative data points do not necessarily mean that something has gone wrong.
[UPDATED 6/24/02] Spending on technology has picked up only modestly, at best. And the telecom sector continues to decline. That said, the recovery is in fact well along, with the manufacturing sector leading the way. Manufacturers have plenty of excess capacity so that they can increase production without spending too much and without needing to hire many workers, yet.
[UPDATED 6/24/02] Even as unemployment continues to rise modestly, actual employment has already begun to rise, although at a very modest pace. The average paycheck has also been rising, and at a rate faster than inflation. That combination of more people working with larger paychecks means that overall national income is rising, which is a very good thing and will continue to fuel consumer spending.
[UPDATED 6/24/02] Companies are reluctant to dramatically increase their spending on technology until they become more comfortable that ‘final demand’ is increasing at a dependable pace. Demand is increasing, but at a slow enough pace that companies are proceeding with great caution. But as each day goes by, an additional increment of that caution evaporates. It may be as painful as watching grass grow or watching paint dry, but investors can be sure that their patience will be rewarded. Sure, it will take some time to get back to ‘normal’, but that result is inevitable even if the timing is uncertain.
[UPDATED 9/10/02] I still don’t have a forecast for Q3 GDP. The accounting is so inscrutable as to defy any rational forecast. At this point it does feel like Q3 is moderately worse than Q2, but the crazy accounting could take it either way. A Reuters poll of economists places Q3 GDP growth around 3%.
[UPDATED 6/24/02] Although the end of the recession has not been officially ‘called’ yet (by the National Bureau of Economic Research), March is the most likely candidate for the ending month of the recession since that was the last month that showed declining employment. Industrial production’s last decline was in December.
[UPDATED 8/14/02] We are still in the turning point where the view in front of your nose is mixed and confusing. Recent economic reports have been weak or mixed, so we probably need another month of data to be able to see where we are going. For me personally, it’s a no-brainer that we very close to the final edge of the turning point, but so many people have lost confidence that they need a truly monumental level of evidence to believe again. But that’s always the way it is with turning points: it’s darkest before the dawn.
[UPDATED 8/24/02] I’ve reset the Tech Stock ‘Safe’ Signal back to 0.00 since it has the last change is over six weeks old. There needs to be a sense of ‘freshness’ to the outlook for tech business that simply isn’t there right now.
[UPDATED 8/24/02] Our ‘safe’ signal requires at least 20% (1 out of 5, or 10 out of 50) of the top 50 tech companies to signal acceleration. Expect one or 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 four to six months in advance of the return of strong growth. Many companies are still trimming Q3 forecasts, and virtually nobody is beating the drum for a great Q4. A lot of people are saying that even Q1 of 2003 will be sluggish. That said, if you want to get the early stock market gains, you'll have to jump the gun and get in before our signal triggers. But if you do, you have to be prepared for some significant volatility and possibly some big losses. You have to decide for yourself whether you want safety in the short run or higher potential returns in the long run.
[UPDATED 9/14/02] For our complete list of resources, click here.
[NEW 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 26, 2002 01:16:18 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology