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(Updated since Saturday – changes marked with [ * ])
Nasdaq-100 future had been up strongly Thursday evening after Microsoft (MSFT) reported quarterly results and guidance, but suddenly fell off a cliff around 3:00 a.m. I can’t be sure, but the precipitating event seemed to be news from Ericsson (ERICY) that their orders were much weaker than people expected. Why they trump Microsoft is baffling, but that’s the way it is with whimsical trader sentiment. There was probably also some amount of leaked rumors of analyst downgrades that were to come out by the morning.
Traders seemed determined to take Nasdaq down, and they did, but for less than an hour and a hour. The market just wouldn’t stay down. I suspect that a number of so-called ‘swing’ traders (willing to hold a position overnight, but not more than a day or two or three) sold short into the rally on Thursday, betting that Microsoft might disappoint and expecting the market to move lower, and then having to buy to cover their short positions as the sell-off ran out of steam.
The significance of Friday’s mini-rally is that Nasdaq not only recovered all of Wednesday’s loss, but hit a new rally high as well. Also, Nasdaq is above it’s 50-day moving average, and has been for 3 of the past 4 days.
But Nasdaq is still struggling with the 1285 “resistance” level. Nasdaq was able to break above that level at the close, but only modestly and had trouble there earlier in the day on a couple of occasions. The question now is whether some additional buyers will show up to keep the rally moving. Too often, a rally nudges a key resistance level and then simply falls apart.
Volume was fairly light (1.46 billion shares). Breadth was slightly positive, with 1.11 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Microsoft (MSFT), but net buyers of Sun (SUNW), Ericsson (ERICY), Siebel (SEBL), Intel (INTC), Motorola (MOT), Cisco (CSCO), EMC (EMC), and Oracle (ORCL).
The Consumer Price Index (CPI) for September registered a modest gain. This was a positive report, showing that inflation is tame and that deflation is non-existent.
The International Trade report for August registered a moderate deterioration in the trade balance (moderate increase in trade deficit) due to a moderate gain in imports coupled with a modest decline in exports. This was a negative report, but there is some belief that companies imported extra goods in August in anticipation of the West Coast port problems. It is worrisome that the trade deficit continues to grow, but it does not have any real short-term or intermediate-term negative consequences, although some people view it as a reason that the dollar needs to decline further.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp decline, and its six-month smoothed growth rate also registered a sharp decline and has been negative for four consecutive weeks. This was a negative report and suggests that there is an increased risk of economic weakness in the months ahead, although not necessarily a large risk of outright recession. Although the recent stock market rally helped the index, sharp weakness in the treasury market as well as sharp gains in jobless claims hurt the index.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 0.85% on Friday to 39.82, which is near the top of the very high anxiety zone (35 to 40). This is a modest decline due to a modest market rally, but people are still quite anxious that the market could fall apart at any moment. There actually was a brief spike up to 41.38 around 10:00 a.m. as the market was falling and people feared that the rally was about to fall apart, but selling petered out and that minor capitulation gave the rally a more solid base to extend its gains for the day.
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 mixed tone for the Friday evening session, closing up 0.42 points, basically flat. This is the usual Friday pattern where people feel no need to adjust their positions much more than during the regular session. The good news is that traders did not feel the need for any significant profit-taking.
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 moderately against the yen and was unchanged 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 fell slightly, 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 rose 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.
There is no need to worry about the situation with North Korea’s nuclear weapon development program. The issue is something that will be dealt with through diplomatic channels. North Korea is very interesting in getting itself removed from the “axis of evil”.
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.
[ * ] Is the “capital sniper” an al Qaeda operative? Short answer: no. There are any number of reasons why the sniper is not likely to be part of the al Qaeda “global terror network”. Connecting dots is a stimulating pastime, but the media is a little gung-ho trying to connect too many dots that are not truly connected. For the most part, most of the media have been good about not trying to promote the sniper as being part of al Qaeda, but there have been a few instances where over-zealous media have raised the question and too strongly suggested that maybe the sniper is connected to al Qaeda. For now, there is not evidence to connect the sniper to al Qaeda and plenty of reasons why the sniper is most likely not connected to al Qaeda.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
Iraq is returning five truckloads of documents that had been looted from the Kuwaiti national archives during the Gulf War. This illustrates the extent to which Iraq is willing to go to mend fences with all its neighbors (except Israel) to try to minimize Arab support for an invasion by the U.S. There is a UN Security Council resolution that calls for Iraq to return the Kuwaiti national archives.
[ * ] Iraq will continue to press on with its ‘charm offensive’, with its latest effort being a blanket amnesty for virtually all prisoners, including political prisoners (although murderers require permission of the families of the victims). Iraq is trying to polish up its image to minimize the support that its neighbors might give to any U.S. attack. A key point here may be that Iraq’s leadership understands that they must lessen the pressure on Iraqi citizens to try to minimize the chance that there will be any uprisings.
We’re still waiting for word on a possible compromise between the U.S. and France on a new UN Security Council resolution covering Iraq.
[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.
[ * ] There has been a fair amount of chatter recently about money managers “asset allocating” out of bonds and into stocks. If true, this would definitely provide a solid base for building a more sustainable rally. It is probably at least partially true. Unfortunately, some money managers, especially at hedge funds, are notorious for shifting their asset allocations one way and then shortly later shifting them back again (or on to yet another asset class). We will know soon enough (within a month) since we do know that money is not flowing into mutual funds, so far.
[ * ] Sooner or later, bond funds will completely run out of steam and begin to reverse. This will surprise and shock many retail investors, but will also inspire the start of a shift of at least some retail assets back into stocks. It may take several months of monthly statements with shrinking balances to convince retail investors, but it is inevitable.
No activity.
[ * ] The rally has had a good run, so any profit-taking is to be expected. But the rally will continue to run as long as there are people willing to believe that maybe this time the rally will last.
[ * ] Market participants will continue to position themselves based on their expectations for Q3 results and Q4 guidance. Market reaction is frequently very unexpected. Sometimes stocks will fall on good news, and other times they will rise on bad news. It’s all a question of where the quarterly results and guidance come in relative to the expectations of each individual trader and investor. And many traders will simply trade in the direction they think the market seems to be trending shortly after news comes out. Meanwhile, institutional investors, hedge funds, pension fund managers, and mutual fund managers will be deciding whether they think the real earnings up-cycle is finally less than two quarters away. Sitting in cash may preserve capital, but people don’t pay most money managers to earn little better than money market rates (minus hefty fees).
My forecast for Monday is that Nasdaq will close in the range -40 to +60. Nasdaq came in at +16 on Friday, modestly below the midpoint of my range of -20 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 10/19/02] The rally is now 7 days old and at its peak (so far). That’s fairly impressive. I’ll give the market five more days before concluding whether we’re truly back to a bear market or just in a trading range (or, heaven forbid, starting on a new bull market). Nasdaq would have to break above 1350 and stay there for at least a week (within the next 2-3 weeks) before people will be willing to suggest that this rally has staying power, and that would just be the next step.
[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 10/21/02] The economy is looking even more mixed than before. Although there are plenty of signs of weakness, there are increasingly tantalizing tidbits of improvement. Here in New York, street traffic and business in restaurants has dramatically picked up. In fact, quite a number of new restaurants have opened, with more on the way. And this is despite the weakness on Wall Street. In Q3 tech profits and Q4 guidance, there is certainly a fair amount of weakness, but there have also been quite a number of bright spots, even if they are small bright spots. I suspect that a number of companies did their best to get as much bad news out as possible so that Q4 would be as strong as possible. I also went back and looked at the September Employment report and noticed that the loss of 43,000 non-farm payroll jobs was actually a 478,000 gain once you remove the seasonal adjustment. It turns out that the change from August to September varies widely over the years, so the seasonal adjustment is rather harsh. And finally, the 400,000 “threshold” for initial unemployment claims is not as hard a boundary as it seems, and 401,000 to 425,000 over the past seven weeks probably does not indicate a true employment contraction since the population and workforce have been growing over the years since the 400,000 rule of thumb was concocted. The bottom line is that the economy is hanging in there and even growing a little, even if it is not up to its full potential.
[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 21, 2002 12:29:03 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology