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Tuesday’s rally was built on the concept that nobody wanted to get left behind and only the most diehard bears wanted to be caught short as the first round of tech quarterly reports were about to come out.
It was one of these feeding frenzies where somebody starts buying and then somebody else buys because they saw the first guy buy and then several people buy because they saw two people buy, and the frenzy just feeds on itself.
Nasdaq-100 futures were benign around midnight (when I was finishing yesterday’s column), but then they starting rising through the night on no particular news. There were probably some rumors and then the frenzy cycle began. By morning, futures were up 18 points, then 25 points, then 33 points. It was crazy.
This was a classic anticipation rally. The focus was on Intel’s quarterly announcement after the close. The expectation was that Intel might surprise to the upside or at least not disappoint too badly, although it didn’t turn out that way.
There was probably a fair amount of short-covering, but there was at least a little ‘real’ buying as well.
Nasdaq broke strongly through the 1250 level and even strongly above its 50-day moving average. Those are good signs, but the question is whether there are enough buyers lined up to keep the rally going.
Volume was moderate (1.73 billion shares). Breadth was great, with 3.06 gainers for each loser.
According to Thomson I-Watch, institutional investors were net sellers of Cisco (CSCO), Nortel (NT), Sun (SUNW), Lucent (LU), Intel (INTC), Oracle (ORCL), Applied Materials (AMAT), and EMC (EMC), but net buyers of Motorola (MOT).
The Manufacturing and Trade Inventories and Sales report for August registered a slight decline in inventories, a modest gain in sales, and a new record low for the inventories/sales ratio. This was a slightly positive report. The inventory decline suggests that businesses are still reluctant to ramp up for future demand, but the sales gain suggests that there really is some demand out there. The low inventories/sales ratio means that businesses will have to raise production to meet future demand, which is a good thing.
The BTM/UBSW Weekly Chain Store Sales Snapshot registered a sharp decline, but that was after a sharp gain in the preceding week. This was a negative report, but there is a lot of week-to-week volatility. According to the report, “Sales were generally on plan, with planned sales generally weak for the department store segment of the business.”
The weekly Reuters Instinet Redbook National Retail Sales Index registered a sharp gain compared to the same week in September. This was a positive report. The gain was attributed to cooler weather sending consumers indoors to shop.
The Kansas City Fed Manufacturing Survey for September deteriorated sharply, but is still showing modest growth. This was a negative report. Production is still growing, but only modestly. Volume of new orders is still growing, but only modestly. Employment is still contracting, but the average workweek is growing again at its best pace since March. On the plus side, Volume of shipments did grow more strongly. The real good news is that the six-month production outlook is just as optimistic as it was in July and August.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a slight gain to -19 from -20 (out of a range from -100 to +100). This was a slightly positive report, but the change is well within the margin of error. There was a 2% improvement in how people view the overall economy, and no change in how consumers view either their own finances or the buying climate.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 6.74% on Tuesday to 39.74, which is near the top of the very high anxiety zone (35 to 40). That’s a dramatic drop in anxiety, but people are still quite anxious about whether this rally is just another flash in the pan, even though it has lasted four days, so far.
Here’s the conflict now: although a high level of anxiety remains a bullish contrarian indicator, traders will tend to want to bail out if VIX falls too far too fast (it’s called “the market is getting ahead of itself”). There is no pre-ordained resolution to this conflict; the market will just struggle to find some sort of equilibrium between supply and demand. The problem is that there may now be a number of people who are ready to take some profits or even take a shot at shorting this rally which is now overextended on a very short-term basis.
The Nasdaq-100 After Hours Indicator had a strongly negative tone for the Tuesday evening session, closing down 32.67 points. There was probably a little profit-taking after the strong four-day rally, but mostly it was disappointment that Intel had a weak quarterly report.
Intel came in light on earnings, but did meet guidance for revenue. Unfortunately, they cut guidance for Q4 earnings, revenue, and capital spending.
Fed funds futures suggest a 25% (down from 45%) chance of a quarter-point rate cut in November. In other words, futures indicate that the Fed will not 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 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 declined moderately, and is now back 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 fell sharply.
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 may continue to be attacks or alleged attacks abroad, but the U.S. “homeland” may be relatively immune, at least for now.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
There is nothing noteworthy to report on Iraq today. Everybody is waiting for some movement on the UN Security Council resolution.
[UPDATED 10/11/02] My assessment remains that there is virtually no chance of an all-out military conflict with Iraq this year and only a 20% chance next year.
[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.
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[UPDATED 8/5/02] Check out our book list.
The California Public Employees Retirement System (Calpers), which is the largest U.S. pension fund with some $135 billion under management, intends to file a shareholder resolution to challenge “excessive” executive compensation policies at General Electric (GE) and demanding that the company adopt a new policy that links pay to performance. This is the kind of reform I’ve been waiting for. Rather than government regulator intervention, these pension managers have the right combination of motivation, leverage, and common interest to work with management to set things right. Go Calpers!
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.
Improving profits at old-economy companies is a good sign for future improvements in business spending, including technology spending. It may take a few more months for the money to filter through the economy, but at least we’re seeing some progress.
Intel says that it has reached the limits of cost-saving. That sounds bad, but it has a silver lining: cost-cutting at major companies over the past two years has been a major contributor to the decline of business spending. It’s a good thing when any major company can say that it sees little room for additional cost-cutting.
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The lackluster quality of Tuesday evening’s tech quarterly reports could well be a weight on the market. We’re overdue for a little profit-taking anyway.
The rally could continue since Nasdaq broke so strongly above its 50-day moving average, but the rally is also very over-extended on a short-term basis. In fact, yesterday’s open left a very large gap that traders will eventually try to fill. But it will take an awful lot of selling to dig down through Tuesday’s 62-point gain to get down into that gap.
Ultimately, the question is whether the market is able to digest bad news (Intel) and move on. Maybe this is the end of the rally, or maybe it’s only the beginning. Off-hours trading is frequently a poor indicator of how the market will perform (close) the next day.
One scenario is that the market opens down sharply (sellers, profit-taking, and shorts) based on disappointment over Intel, but that selling peters out very quickly and we get a little selling-exhaustion, which causes a bounce that causes day traders to pile on again, which causes the shorts to cover, and so on, and up we go. Or, people could just throw in the towel, saying that the party was great while it lasted and now it’s time to get out again.
Note that companies are being forced to be ultra-conservative in their guidance, so that there is a good chance that Q4 will be better than expected, even for Intel. So, don’t be too disappointed by lackluster guidance for Q4.
Note that although the stock market frequently focuses on the short-term (this quarter), the market also frequently starts to look ahead and anticipate where the economy and business outlook will be in six months.
The primary focus of the market will be anticipation of quarterly reports. There is still the possibility that the market has been rallying in anticipation of the reports, but may fall on the actual reports, even if they’re fairly decent. Still, the market could continue to rally if we start to see at least some sense of hope in the reports.
The simplified schedule is: IBM (IBM) and Siebel Systems (SEBL) on Wednesday, and Broadcom (BRCM), Lam Research (LRCX), Microsoft (MSFT), and Sun (SUNW) on Thursday.
Reports due on Wednesday: ATMI (ATMI), Ultratech Stepper (UTEK), Harris (HRS), Advance Micro Devices (AMD), Akamai (AKAM), Apple (AAPL), CDW Computer (CDWC), Celestica (CLS), Electronics for Imaging (EFII), Extreme Networks (EXTR), IBM (IBM), Interwoven (IWOV), Macromedia (MACR), Polycom (PLCM), QLogic (QLGC), RSA Security (RSAS), SanDisk (SNDK), Siebel Systems (SEBL), Symantec (SYMC), Vignette (VIGN).
Reports due on Thursday: Cypress Semiconductor (CY), EMC (EMC), Nokia (NOK), SprintPCS (PCS), StorageNetworks (STOR), Advance Fibre Communications (AFCI), Atmel (ATML), Avid Technology (AVID), Broadcom (BRCM), Checkpoint Software (CHKP), CNET (CNET), Compuware (CPWR), Cree (CREE), DigitalThink (DTHK), E.piphany (EPNY), eBay (EBAY), Fairchild Semiconductor (FCS), Gateway (GTW), Handspring (HAND), i2 Technologies (ITWO), Integrated Device (IDTI), Iomega (IOM), Ixia (XXIA), Kana Software (KANA), Lam Research (LRCX), McDATA (MCDT), Mercury Interactive (MERQ), Microsoft (MSFT), National Instruments (NATI), Nortel (NT), PeopleSoft (PSFT), PMC-Sierra (PMCS), Rational Software (RATL), Scientific-Atlanta (SFA), Secure Computing (SCUR), Sprint (FON), Sun (SUNW), Sybase (SY), Western Digital (WDC), Xilinx (XLNX).
Reports due on Friday: Tellabs (TLAB).
My forecast for today is that Nasdaq will close in the range -50 to +60. Nasdaq came in at +62 on Tuesday, slightly above the upper end of my range of -30 to +60. 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 10/16/02] Thanks to Nasdaq being able to maintain and build on all its recent gains, I’ll give the market four more days before concluding whether we’re truly back to a bear market or just at the lower edge of a trading range.
[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: October 15, 2002 11:45:58 PM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology