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(Updated since Saturday – changes marked with [ * ])
Although there were quite a number of disappointing tidbits of news on Friday, the market decline was mostly just profit-taking. Since there are not yet significant inflows into mutual funds, gains like we had earlier in the week are not very durable since traders and speculators tend to “run for the exits” at the first hint of potential disappointment regardless of its true significance.
Although Nasdaq did close a point under the psychological 1200 level, the level did hold fairly well. Nasdaq stayed well above 1200 until the final hour when it fell 8 points in about 10 minutes and barely poked below 1200, but it managed to immediately bounce up a few points. It hit 1200 again around 3:30 p.m. and stayed within a point for about 5 minutes before bouncing up a few points, but at 3:45 p.m. it headed down and finally managed to break below 1200 by almost two points. It recovered slightly in the final 5 minutes, but couldn’t muster the 84 cents to recover to 1200. There was no evidence of any ‘real’ selling in the final 50 minutes, just short-term trading.
The selling looked to be momentum traders bailing out ahead of the weekend. Some of the selling could have been due to speculators who bought earlier in the week, but who got kicked out by tight stop-loss orders.
Volume was very light (1.42 billion shares). Breadth was quite poor, with 2.20 losers for each gainer. The light volume suggests that the market decline was more of an over-reaction. There simply wasn’t a lot of ‘real’ selling, since that tends to show up as trading on high volume.
According to Thomson I-Watch, institutions were heavy buyers of Sun (SUNW), Cisco (CSCO), Intel (INTC), Nortel (NT), Lucent (LU), Microsoft (MSFT), SBC (SBC), EMC (EMC), and Oracle (ORCL). These guys must at least think they know something that traders don’t.
The final revision of Q2 GDP registered a modest improvement to the preliminary revision. This was a slightly positive report. The economy was not in as bad shape as some had been claiming, but the big questions now are how the economy was in July, August, and September and how it will be in the coming three months.
The revised University of Michigan Consumer Sentiment Survey for September registered a very modest decline from the preliminary report, which is still a moderate decline from the August report. This was a slightly positive report since it was not as bad as expected. As always, it is important not to attach too much importance to consumer confidence reports since they are at best lagging indicators and have very little predictive value as forecasting tools for future consumer spending, but they are fun to look at.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a moderate decline and the 6-month smoothed growth rate also declined moderately and is now negative. This was a negative report. Although one week is not enough to determine a trend, this index is now pointing to a slight economic contraction in the months ahead. That’s not a certainty, just a tendency. The index is roughly where it was in the middle of December 2001.
The New York Stock Exchange Margin Debt report for August registered a 2.5% decline to $132.8 billion, the lowest level since January 1998 (although October 1998 did dip below that level for a single month). Cash in non-margin accounts at NYSE member firms fell by 7.5% and cash in margin accounts fell by 2.73%, but is still at rather high levels. The good news was that the market rally in August did not come as a result of investors taking on additional margin debt. This is a change from past rallies and a good sign.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 7.53% on Friday to 43.14, which is in the upper half of the extremely high anxiety zone (40 to 45). Clearly people responded negatively to the market decline. A rapid rise in VIX tends to be a contrarian bullish signal, but you can’t predict when the market bounce will occur.
The Nasdaq-100 After Hours Indicator had a mostly negative tone for the Friday evening session, but recovered, closing down 0.04 points, basically flat. This is the typical Friday evening pattern where people simply don’t make much in the way of net changes to their positions going into the weekend.
Fed funds futures suggest a 70% (up from 63%) 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 rose modestly against the yen and fell modestly 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 rose modestly, and is still slightly above the psychological $30 level.
[ * ] Tropical Storm Lili looks poised to move across the Gulf of Mexico later in the week and threaten oil production and refining facilities in Texas and Louisiana. How much of a threat remains unclear, but oil prices frequently pop up (temporarily) on these kinds of weather events.
[ * ] I read that some oil analysts do not think there is hardly any “war premium” in oil prices right now. I’m skeptical of that position. There is probably at least $2 to $6 of war premium. The open question is whether there may be as much as $8 to $10 of war premium. There could be an additional premium (surcharge?) that gets tacked on if it looks there is a more serious chance of an oil supply disruption, but there is nothing pointing to that scenario at this time. There is also the question of whether the term “war premium” refers only to Iraq or includes the Palestinian conflict or the “war” on terrorism as well. The thing that makes the calculation (estimation) difficult is that the uneven nature of the world economy precludes any clean estimate of true economic demand for oil as opposed to speculative demand by those who are trying to bet that oil prices could move higher.
[ * ] I also read that people believe that the administration is filling the U.S. Strategic Petroleum Reserve to the tune of 150,000 barrels per day. It’s difficult to say how much of current oil price levels is due to that excess demand, or for how much longer that excess demand will continue.
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 modestly.
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, but there could be significant attempts at revenge killings after Israel botched the assassination of a Hamas leader. But the end of the ‘”siege” of Arafat’s headquarters may have overwhelmed all other immediate concerns. The Palestinians may revel in this minor victory for a little while. It may have looked like Israel lost this skirmish, but in truth, they did make the point that they will have zero tolerance for additional major attacks on Israeli civilians.
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.
As of Friday, Secretary of Defense Rumsfeld continues to insist that President Bush “has made no decision on possible military action.”
According to a Pentagon “news story” released on Friday, “American officials are concerned that even the most intrusive inspections would have difficulty getting at Saddam Hussein's weapons of mass destruction.” According to Rumsfeld, Saddam Hussein’s “facilities are mobile; they have been widely dispersed … to a number of locations; (he has) vast underground networks and facilities, and sophisticated denial and deception techniques… In addition, (weapons and military facilities) have been placed in close proximity to hospitals, schools and mosques.”
France became more insistent that the UN Security Council should deal with Iraq with a two-step strategy in which the first resolution is aimed at getting the inspectors back in and a second resolution would deal with the consequences if Iraq does not allow the inspectors to work freely. China is insistent that the U.S. not act unilaterally and Russia insists that no new resolutions are needed and that the inspectors should go into Iraq as soon as possible. Everybody is working the issue, and I think it is clear that American polls tell President Bush that he needs UN backing to start a war with Iraq. It seems unlikely that the Security Council will get its act together in less than a week or two.
[ * ] Even the leaked U.S. proposal for the Security Council resolution would give Iraq at least 30 days before any military enforcement, and it’s not likely that France, Russia, or China will go along. Most likely, Iraq will get at least two or three months to comply, and even that will probably get stretched out. The U.S. is also attempting add additional conditions on Iraq, but mostly those conditions merely reverse restrictions that were negotiated by Iraq back before the 1998 crisis. There may be a mini-crisis over these restrictions, but Iraq will ultimately give in to any conditions that will avert an all-out war with the U.S.
Meanwhile, Congress is still noisily resisting the proposed congressional resolution. The Senate could schedule a debate next week, except for the fact that there is no generally agreed upon resolution to debate. It may take another week or two to get things under control. The problem is that Congress wants to adjourn for the November election within a week and would rather not stay in session for more than another week. The Democrats want more time to work on the resolution, but would also like to get it behind them so that they can shift the election debate away from Iraq.
My assessment remains that there is virtually no chance of an all-out war with Iraq this year and only a 20% chance next year.
[ * ] Although Iraq is an ongoing concern, it’s not clear whether the market has or hasn’t already fully discounted it from stock prices. Any significant news on Iraq could certainly move the markets, but there is likely to be an uneven flow of both good and bad news, which will only increase market volatility.
[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.
[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.
[ * ] The “lockout” of workers at shipping ports on the West Coast may hurt the economy modestly, but probably not a lot since the labor problem has been known for some time and businesses have been finding ways to deal with the potential for disruptions.
I made my weekly dollar-cost-averaging purchase of January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $14.
[ * ] Today is the last day of the month (and quarter), so we could see some window dressing activity or at least some short-sellers may not be willing to stand in the way for any potential window dressing buying.
[ * ] The big focus will continue to be on corporate performance. A few companies will be reporting over the next few days, but mostly the market will be on a hair trigger as far as preannouncements.
[ * ] The market is in a technically oversold condition, so a bounce could happen at any time. It is also possible to see a significant intra-day decline and then recovery. It all depends on whether the decline is driven by short-sellers or ‘real’ sellers. Short-sellers have to cover their short sales eventually, and day-trading short-sellers have to cover before the end of the day.
My forecast for Monday is that Nasdaq will close in the range -40 to +80. Nasdaq came in at -22 on Friday, moderately above the lower end 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 9/28/02] The market performance over the past four days suggests that maybe we aren’t back in a bear market (yet) and we could still be in a trading-range market. Nasdaq has been able to refrain from breaking too far below the psychological 1200 level. But if we can’t make much progress over the next several days, then we could easily fall back into bear market mode.
[UPDATED 9/25/02] Technically, we are back in a bear market (as of Monday, 9/23) 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 30, 2002 12:46:33 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology