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Okay, so we had an overdue day of profit-taking. The disappointing quarterly report and guidance from Intel (INTC) was the trigger, but we knew some profit-taking had to hit us eventually.
Interestingly, Nasdaq declined only 7 points from it’s opening level. It hit its closing level a few minutes after noon. Also, Nasdaq closed a few points higher than its low for the day which occurred a few minutes after 2:00 p.m. It stayed in a narrow range all afternoon. Sure, the net decline was severe, but beyond the opening fall, we just didn’t see much net selling pressure at all.
We did see a moderate bounce (14 points) shortly after the open, but it petered out by 10:00 a.m. and by 11:45 a.m. it had completely evaporated.
Volume was light (1.38 billion shares). Breadth was moderately negative, with 1.57 losers for each gainer. A sharp decline on light volume is not very important.
According to Thomson I-Watch, institutional investors were net buyers of Intel (INTC), Motorola (MOT), Sun (SUNW), Cisco (CSCO), Lucent (LU), Oracle (ORCL), Nortel (NT), AT&T Wireless (AWE), and Applied Materials (AMAT). Clearly, institutional investors saw the market decline as a great buying opportunity.
The weekly Mortgage Bankers Association (MBA) Mortgage Applications Survey registered a modest decline, with a modest decline in both refinancing and applications to purchase. This was a slightly negative report, but mortgage demand still remains near the record high.
The National Association of Home Builders (NAHB) Housing Market Index registered a very slight decline. This was a slightly negative report, but housing demand is still very strong.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 2.66% on Wednesday to 41.97, which is in the lower half of the extremely high anxiety zone (40 to 45). That was only a modest rise in anxiety considering the market drop. I think people recognized that a fair amount of profit-taking was in order and that reaction to the Intel disappointment was excessive.
The high level of VIX is a contrarian bullish indicator, but the market could decline further before rallying again.
The Nasdaq-100 After Hours Indicator had a strongly positive tone for the Wednesday evening session, closing up 17.31 points. People believe that the sell-off was overdone and decent quarterly reports, especially from IBM (IBM), drove optimism up.
Fed funds futures suggest a 25% (unchanged) 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 fell modestly 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 modestly, and remains below the psychological $30 level.
The latest inventories report shows that there is plenty of oil sloshing around, even without that French tanker in Yemen.
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.
There was nothing new in the news that North Korea has enough plutonium for a couple for nuclear weapons. That information has been floating around for a while. In fact, previous reports suggested that the U.S. believed that North Korea quite likely had a couple of nuclear weapons. The news is that North Korea was forced to admit that it still had its nuclear program, after the U.S. showed them hard evidence.
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.
Everybody is waiting for the UN Security Council to finish debating over Iraq (or the U.S. proposed resolution, to be specific) and come up with one or more resolutions (as if we didn’t already have enough of them).
Meanwhile, Iraq will be on relatively good behavior to avoid giving the U.S. further justification to attack unilaterally.
[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.
No activity.
[UPDATED 8/5/02] Check out our book list.
There seems to be renewed interest in the issue of independent research, but the latest SEC proposal would merely force the big brokerage firms to subsidize independent research firms while keeping their in-house research intact. This could be a mess. It would be so much better to force a hard separation of research, investment banking, and brokerage. The current mess illustrates the extent to which the SEC can only force reforms that the big firms agree to. That’s an awfully sorry form of regulation. I suspect what will happen is that one of the big firms will find some advantages and voluntarily spin off its research and then the others would follow suit.
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.
Motorola (MOT) is forecasting that their capital spending will be higher in 2003. That’s a welcome sign after so many companies have been cutting spending.
Motorola’s near-term view of the economy probably reflects the views of many companies: “Rather than a slow but steady quarter-to-quarter upward trend in global economic growth, it appears now that an irregular short-term up and down economic growth pattern may emerge quarterly.” That’s not necessarily how the economy will play out, but that is the conservative assumption that corporate planners probably feel compelled to make due to the lack of visibility.
It does seem that quite a number of companies are cutting guidance (both earnings and revenues) for Q4 and 2003. That’s not as bad as it sounds. They have no choice when Q3 was soft and there is little visibility. Plus, in today’s legal environment, it would be suicidal to stick your neck out and offer any bold guidance since that would leave you wide open to class action lawsuits (and SEC and state attorney general investigations) should that guidance fall far short.
No activity.
It will be interesting to see if we get some follow-through rallying after Nasdaq-100 futures were up so strongly on IBM’s report, not to mention expectation of Microsoft having a decent report.
The latest weekly unemployment insurance claims report this morning will give us a few more clues about the labor market.
The primary focus of the market will be anticipation of quarterly reports, especially Microsoft. 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 for today is: Broadcom (BRCM), Lam Research (LRCX), Microsoft (MSFT), and Sun (SUNW).
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 -30 to +60. Nasdaq came in at -50 on Wednesday, right at the lower end of my range of -50 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] It was good to have a test of the rally to give us a chance to see how many people were just there for the day-to-day momentum. We still have most of the recent gains intact, including some of the Tuesday gain. I’ll give the market three 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 16, 2002 11:51:07 PM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology