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The West Coast port lockout, an alleged new bin Laden tape, the damaged French tanker off Yemen, and anticipation of President Bush’s Iraq speech (and the decided lack of good news) all weighed on the market.
Volume was very light (1.22 billion shares). Breadth was lousy, with 2.7 losers for each gainer. A loss on such light volume is not very significant. The good news is that there was not any significant ‘real’ selling.
According to Thomson I-Watch, institutional investors were net buyers of Sun (SUNW), Cisco (CSCO), Lucent (LU), EMC (EMC), Intel (INTC), Nortel (NT), Oracle (ORCL), and Motorola (MOT). It’s quite common for institutions to be buying stocks when the market is being beaten down unreasonably. These guys know (relative) bargains when they see them.
The Consumer Credit report for August registered only a modest gain. This was a mixed report, since it is good that consumers are not loading up with debt, but not so good that they have cut back on spending somewhat.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 6.27% on Monday to 49.18, which is near the top of the near-panic zone (45 to 50). There were a couple of minor spikes, but VIX rose dramatically through the afternoon, peaking at 49.71 just a few minutes before the close, and then falling off a bit into the close. The spike did not represent a clear capitulation event, but may be good enough for short-term traders to cover some shorts.
In any case, such a high level of VIX is frequently considered a contrarian bullish signal. That’s not a guarantee that the market won’t go down further, but simply that a strong bounce could happen any day.
The Nasdaq-100 After Hours Indicator had a mostly positive tone for the Monday evening session, closing up 1.23 points. People believe that the sell-off was overdone, but given the fierceness of recent negativity, people are reluctant to stick their necks out too far, yet.
Fed funds futures suggest a 73% (up from 70%) 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 moderately 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 below the psychological $30 level.
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 rose 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.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The eerie calm continues.
There is still unresolved confusion over whether the explosion and fire on the French oil tanker off Yemen was an accident or terrorism.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
President Bush’s speech was mostly as expected, but it did seem to contain more olive branches than expected. It mentioned that any attack on Iraq would be by a coalition led by the U.S., as opposed to being pure unilateralism. It clearly defined how Iraq can avoid attack. It made clear that a decision to attack has not yet been made. It made clear that an attack was not imminent. Overall, the speech was toned down enough that it might convert a few more skeptics (especially in Congress) to be supporters.
The House is expected to vote on their version of the congressional resolution by Thursday. The Senate is expected to take a few more days, but maybe the President’s speech will convince them to speed things up. In any case, we’ll have a congressional resolution in less than 10 days.
The UN Security Council resolution will take another week or two after the congressional resolution. And then the inspectors will begin work within two weeks of the UN resolution.
[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.
I attended a symposium at the American Enterprise Institute on the IMF proposal for sovereign debt restructuring. A number of experts made presentations on the various aspects of countries who are at risk of defaulting on their debt that is held by investors outside the country. Presentations were also made by a high-level official from the IMF as well as the chairman of the President’s Council of Economic Advisors. They are struggling with the extent to which the solution should be through laws or more informal market-based solutions. There are lots of messy technical problems, but these guys are making gradual progress towards a viable solution. The symposium was the culmination of a joint meeting of a group of so-called shadow financial regulatory committees, one for the U.S., one for Europe, one for Japan, and one for Latin America. Oh, and lunch was free.
No activity.
The market is in a deeply technically oversold position, so a strong bounce is due any day.
We’ll have to see how the market reacts to President Bush’s Iraq speech. Futures were up after the speech, so that’s a good sign.
There’s still time for companies to issue Q3 warnings, but we’ve probably gotten most of the bad news already.
My forecast for today is that Nasdaq will close in the range -20 to +80. Nasdaq came in at -21 on Monday, 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 10/1/02] The market performance in recent days suggests that maybe we aren’t back in a bear market (yet) and we could still be in a trading-range market. 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) 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: October 08, 2002 12:04:34 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology