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That was a nice gain for Nasdaq on Thursday, recovering 80% of the loss from the ‘test’ on Wednesday.
It actually wasn’t really a strong rally, but more like traders repositioning themselves before the market opened. Nasdaq closed up only 3 cents higher than the open and stayed in a tight +/- 8-point range from the opening level for most of the day. There was a brief whipsaw in the first hour, but Nasdaq settled into the tight trading range after that.
Volume was fairly light (1.58 billion shares). Breadth was strongly positive, with 2.65 gainers for each loser. But even a nice gain doesn’t mean very much on light volume.
According to Thomson Financial, institutional investors were net sellers of Oracle (ORCL), Cisco (CSCO), Nokia (NOK), and Intel (INTC), but net buyers of Sun (SUNW), EMC (EMC), Lucent (LU), Motorola (MOT), and Nortel (NT).
The Unemployment Insurance Weekly Claims report was disappointing with a sharp increase in both initial and continuing claims. This was a negative report, but there tends to be a lot of volatility each week. The only bright spot was that the 4-week moving average of initial claims declined moderately, but it is still moderately above the 400,000 threshold which suggests that overall non-farm payroll employment may not be growing. Even the raw, unadjusted, actual claims rose sharply and are substantially higher than two weeks ago. This was a weak report, but we’ll need to see another two weeks of data before we can point to a worrisome trend.
The New Residential Construction report for September registered a sharp rise in housing starts (to a new 16-year high) and a strong gain in new permits as well. This was a positive report.
The Industrial Production report for September registered a slight decline when a slight gain was expected. This was a negative report. The manufacturing sector is basically stalled, but there is no easy way to project future production from current (or past) production.
The Philadelphia Fed Business Outlook Survey for October registered a sharp decline and is negative for a second consecutive month, indicating that the manufacturing sector in the Philadelphia Fed district is contracting. This was a negative report. All components of the index were lousy, except for the six-month outlook, which was actually positive. As with the industrial production report, there is no easy way to project future business from current (or past) business.
The SEMI Chip Equipment Book-to-Bill Ratio for September registered a sharp decline to below 1.00 as bookings (orders) fell below billings (shipments). There was a modest decline in shipments as well. This was a negative report. Note that this report is for equipment used to produce chips, not orders and shipments of chips themselves.
After the close: AMG Data Services reports that for the week ended Wednesday, October 16, $4.1 billion flowed out of equity funds. This was a negative report and suggests that the recent rally was not based on inflows to mutual funds, so the durability of the rally is questionable and most likely the result of a rapid influx of ‘hot money’ (e.g., hedge funds and other institutional investors shifting away from bonds) that can turn and leave as fast as it came. Real estate funds reported their fourth consecutive week of outflows. $1.4 billion flowed into taxable bond funds. $505 million flowed out of municipal bond funds, the first outflow in 11 weeks. $3.3 billion flowed into money market funds.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 4.31% on Thursday to 40.16, which is just above the bottom of the extremely high anxiety zone (40 to 45). That’s a dramatic drop in anxiety, but people are still quite anxious about whether the market and economy are really going to hold up or fall off a cliff.
The high level of VIX remains 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 Thursday evening session, closing up 13.65 points. Strong quarterly results from Microsoft boosted optimism. Overall, quarterly results seemed fairly decent, although there were numerous shortfalls.
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 rose modestly against the yen and rose sharply 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 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 moderately.
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.
The CIA Director says that further attempts at domestic attacks by al Qaeda may be imminent. It’s probably true that they want to strike, but they will also be careful to wait for a time and place when they think our guard is down, and there is simply no way that we will be as unprepared as we were on 9-11.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
France and the U.S. are duking it out at the UN Security Council over the Iraq resolution. Something will happen, eventually, it’s merely a question of when. According to MSNBC.com, U.S. officials told NBC’s Andrea Mitchell on Wednesday night that the administration must get a U.N. vote by the end of the month — or decide to go it alone. I would expect that we’ll get a resolution by then, if not within a week. In any case, I suspect that the U.S. actually prefers to have the resolution (and inspections) delayed to allow the U.S. military to continue to ramp up its presence in the region. There is some talk that a compromise resolution might be agreed to as early as today.
[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.
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.
Sun (SUNW) went the opposite direction of Motorola and has reduced its planned capital spending for next year very dramatically. They’re also going to cut their head-count dramatically. These are both bad signs for the economy, but investors may be pleased that the company is focused on becoming leaner and meaner next year.
No activity.
We got some decent quarterly reports (including Microsoft) last night, so it will be interesting to see how much of that good news wasn’t already anticipated by the market. We could also see some rallying in relief that results weren’t worse. Some people were anxious that Microsoft might stumble as Intel had on Tuesday.
Tellabs (TLAB) is the only tech reporting today.
There will be plenty more quarterly reports next week, so market participants need to continue to position themselves for anticipated good (or bad) news.
Today is a Friday, so a lot of traders will be tempted to close out positions ahead of a weekend when anything can happen.
My forecast for today is that Nasdaq will close in the range -20 to +60. Nasdaq came in at +40 on Thursday, well above the midpoint 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 10/18/02] Nasdaq recovered nicely on Thursday after the big test on Wednesday, so we have all but 10 points of the recent rally intact. 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 (or, heaven forbid, starting on a new bull market).
[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 18, 2002 12:27:40 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology