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Nasdaq struggled to try to get back on its feet Wednesday and almost did, but faltered a bit, causing people to bail out again. The good news is that there didn’t seem to be any significant amount of ‘real’ selling.
Volume was light (1.53 billion shares). Breadth was terrible, with 2.93 losers for each gainer. It was interesting that the Nasdaq-100 index declined by significantly less than the overall Nasdaq composite, suggesting that people were rotating from the small and mid-caps to the large-caps.
According to Thomson I-Watch, institutions were net buyers of Sun (SUNW), Cisco (CSCO), Lucent (LU), Nortel (NT), Oracle (ORCL), Motorola (MOT), Ericsson (ERICY), Intel (INTC), and EMC (EMC). I can’t imagine that these ‘smart’ people would be buying this stuff if the market were truly about to fall off a cliff.
The weekly Mortgage Bankers Association (MBA) Mortgage Applications Survey registered a moderate gain (to a new record high), with a moderate gain in refinancing (another new record high), but a modest decline in applications for purchase. This was a positive report. Purchasing is still strong despite the modest decline. Note that people sometimes put in multiple applications to shop around for a better rate, so fluctuations in the applications for purchase don’t necessarily indicate any trend in actual home purchases. In any case, the housing “pillar” of the economy is still standing strong.
The Economic Cycle Research Institute (ECRI) Coincident Employment Index (CEI) for September rose moderately for the second consecutive month and is now well above the level of the first half of 2002. This was a positive report. It indicates that labor markets are definitely improving even if the headline numbers don’t show it yet. Furthermore the ECRI Leading Employment Index (LEI) is pointing to further improvements in the months ahead.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 6.50% on Wednesday to 49.48, which is near the top of the near-panic zone (45 to 50). VIX peaked at 49.99, just a hair below the moderate panic zone. People are wondering if the market is poised to recover or poised to fall off a cliff, but they’re still not ready to really panic.
A high level of VIX is a contrarian bullish signal, but it’s also possible that the market could continue to fall a bit longer until a strong bounce.
The Nasdaq-100 After Hours Indicator had a mostly positive tone for the Wednesday evening session, closing up 2.22 points. Yahoo (YHOO) had a decent quarterly report. People do 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 68% (unchanged) 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 sharply against the yen and 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 slightly, 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.
The attackers of the U.S. Marines in Kuwait are alleged to have an al Qaeda connection, but the attack sounded more lack a spontaneous attack that was more based on an immediate response to seeing violence in Palestine than part of a global terror campaign orchestrated by al Qaeda.
Officials believe that a new audiotape is by bin Laden’s deputy and calls for additional attacks. It will be interesting to see whether al Qaeda cells attack only when told to by this kind of public announcement or whether they have secret signals and these public announcements are merely propaganda to disrupt our lives. It would seem counterproductive for al Qaeda to warn us of impending attacks. I would think that they would rather catch us totally off-guard.
There are still no concrete conclusions about the cause of the damage to the French tanker off Yemen. There are a few reports that point to a Cole-like terrorist attack, but we just don’t have enough information to draw any solid conclusions yet.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The great debates continue in Congress. I stopped by the Senate gallery to watch a little of it in the afternoon. Of course you can see all this on C-SPAN or C-SPAN’s web site, but watching it in person is a completely different experience. Senator Byrd was on the floor for a while, doing his best to convince people to extend the debate, but I think most Senators just want to get it over with today and go home, either to campaign for reelection or to rest. There is a fair chance that the Senate will indeed vote today, and the House is expected to vote almost for sure. In any case, many of the speeches are quite good, very thoughtful, well-argued, and quite informative. It’s comforting to see our elected (and well-paid) representatives earning their keep for a change.
[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 hearing of the Senate Foreign Relations Committee on the topic of non-proliferation of weapons of mass destruction. Despite the recent focus on Iraq, there have been several ongoing efforts to attempt to deal with proliferation of weapons of mass destruction. The primary problem is that Russia has all these weapons and weapons scientists and does not have the money to get rid of the weapons or pay the scientists enough to dissuade them from helping deep-pocket countries such as Iran, Iraq, et al. The hearing focused on a new G8 (G7 plus Russia, with G7 being the U.S., Canada, Japan, Britain, France, Germany, and Italy) initiative to get more countries to chip in more money to help Russia (and other countries) dismantle and destroy these weapons and develop new programs to occupy the former weapons scientists. There are also two dozen research reactors around the world that have fuel which needs to be protected from diversion. The U.S. has been paying the salaries of a number of Russian scientists for more than a few years now. The concern is not limited to nuclear material, but chemical and biological weapons as well. For example, Russia has over a million old artillery shells armed with sarin and VX nerve agents. The ultimate problem is that with all the focus on terrorism and Iraq, not enough attention (and money) is being paid to non-proliferation.
No activity.
The West Coast longshoremen are back to work, but it may take a while for people to sense whether they are going to be working at a decent pace, or continuing the previous slowdown. They will be working around the clock, so the market should get a sense of how things are going as the day wears on.
The weekly unemployment insurance claims report that is due out this morning will give us another clue about the labor market.
The market continues to be in a deeply technically oversold condition, so a strong bounce is due any day.
My forecast for today is that Nasdaq will close in the range -20 to +80. Nasdaq came in at -15 on day, well 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 10/10/02] I’ll give the market another two days before concluding whether we’re truly back to a bear market or just at (or slightly below) the lower edge of a trading range.
[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 10, 2002 12:31:53 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology