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Traders did their best to push the market down on Monday, but succeeded only modestly and only for about an hour and 20 minutes for the darn thing took off again. It looked as if there was some ‘real’ buying in the late morning and early afternoon which just blew the traders away as Nasdaq rose 33 points between 11:00 a.m. and 12:40 p.m. It rose only another 7 points during the rest of the afternoon, but the good news was that traders were unable to push the market back down under the psychological 1300 level for the rest of the day, other than for a couple of minutes around 1:45 p.m.
At least some traders jumped on comments from Microsoft’s (MSFT) CEO that tech business would be tough and that strong sales in the last quarter were an anomaly. That negative sentiment dragged down everything at the start, but it quickly wore off, except for Microsoft’s stock itself. The comment was completely consistent with previous information about Microsoft, but traders have a way of focusing on details out of all proportion to their true fundamental value. Also, Microsoft did not retract its upside guidance from last week, so the company is in no worse shape than Friday. The bottom line is that there were probably a bunch of momentum traders holding the stock from last week and the talk spooked them into dumping their positions. Also, Steve Ballmer is notorious for trying to talk down the stock.
Volume was quite light (1.37 billion shares). Breadth was reasonably positive, with 1.51 gainers for each loser. The light volume suggests that the rally will not be as durable as we would like.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), Ericsson (ERICY), and JDS Uniphase (JDSU), but net buyers of Sun (SUNW), Nortel (NT), Lucent (LU), Intel (INTC), Motorola (MOT), and AT&T (T).
The Conference Board U.S. Leading Index for September declined modestly, as expected. This was a negative report. Normally a decline in a leading index is a serious concern, but economists and the market have been expecting Q4 to be weak since August, so it’s no big surprise. Also, there have been some bright spots since September. In case you’re wondering what goes into this index, The Conference Board tells us that, “Five of the ten indicators that make up the leading index decreased in September. The negative contributors - from the largest negative contributor to the smallest - were stock prices, average weekly initial claims for unemployment insurance (inverted), interest rate spread, manufacturers' new orders for nondefense capital goods, and index of consumer expectations. The four positive contributors to the index - beginning with the largest positive contributor - were vendor performance, building permits, real money supply, and manufacturers' new orders for consumer goods and materials. Average weekly manufacturing hours held steady in September.”
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 2.29% on Monday to 38.91, which is in the upper half of the very high anxiety zone (35 to 40). People were relieved by the nice rally, but still quite anxious as to how long the gains will stick.
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 negative tone for the Monday evening session, closing down 13.88 points. A moderate decline due to profit-taking would be expected, but most of this decline was due to disappointment over Texas Instrument’s (TXN) Q3 results and Q4 outlook.
Fed funds futures suggest a 20% (down from 25%) chance of a quarter-point rate cut by the November FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the November 6 FOMC meeting.
Fed funds futures suggest a 56% chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed is just barely likely to cut rates at the December 10 FOMC meeting.
[UPDATED 10/22/02] 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. Most likely, the Fed will not cut rates this year at all, unless there is a significant further deterioration of the economy.
The dollar fell 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 fell sharply, and is moderately below the psychological $30 level. The nominal reason for the decline was a belief by traders that comments by Secretary of State Powell mean that the U.S. priority is not regime change (i.e., all-out war and/or removing Saddam Hussein from power), but merely the disarmament of Iraq. Even President Bush commented that Iraq could avoid war if it fully complied with all the UN resolutions for disarmament, but then hedged by suggesting that it was unlikely that Iraq would do so. Traders react as they see fit, but it is too soon to conclude that there won’t be a war at all, although my (minority) assessment is that there won’t be a war this year and only a 20% chance of a war next year. Note that traders dealing on the spot market or on short-term futures (e.g., December) ultimately don’t care what happens more than a few months from now.
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. Things did get messier in Israel with a car-bombing of a bus that killed 14 and injured dozens, an expectation that Israel will retaliate for that bombing, and reports of a plot by right-wing Israeli extremists to assassinate the Israeli Defense Minister, but the impact of these events outside the immediate region of the Middle East seem minimal at this point.
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.
I continue to believe that the DC-area sniper is not connected to the al Qaeda “global terror network”.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
There is still no word on the new UN Security Council resolution on Iraq, but it’s coming, and soon.
Both Secretary of State Powell and President Bush made generous comments that Iraq can avoid war if it disarms, but President Bush was less diplomatic in suggesting his belief that it was unlikely that Iraq would do so. President Bush in fact said that full compliance by Iraq with all UN resolutions (“if he were to meet all the conditions of the United Nations”) would in itself signal that “the regime has changed.” That’s a definite loosening of the meaning of “regime change”, which people had previously taken to mean the removal of Saddam Hussein from power. This new phrasing may have been the original intent, but at a minimum the new emphasis of the phrasing may be designed to make it easier for people to vote Republican in the election and for China, France, and Russia to go along with a new proposed UN Security Council resolution being shopped by the U.S. Finally, just to be sure that there was no lingering confusion, White House spokesman Ari Fleischer made the policy absolutely crystal clear by stating that “The policy is regime change, however it is defined.”
[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.
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I made my weekly dollar-cost-averaging purchase of January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $14.
It will be interesting to see if the market is able to rally in the face of the disappointing news from Texas Instruments. It would be quite reasonable for the market to pull back a bit on such negative news and after such a strong run-up, but it would be equally reasonable for the market to look beyond the short-term and continue to rally on expectations that gradual improvements in the non-tech portions of the economy will eventually filter down to improved demand for technology.
[UPDATED 10/21/02] 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.
[UPDATED 10/21/02] 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 today is that Nasdaq will close in the range -40 to +60. Nasdaq came in at +22 on Monday, moderately above midpoint of my range of -40 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 10/22/02] The rally is now 8 days old and at its peak. That’s fairly impressive. I’ll give the market six 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 11:32:26 PM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology