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This sucker just won’t give up! Of course everybody knows that it probably is nothing more than a typical bear market rally. But still, that is what the first stage of a new bull market looks like as well. We’ll all just have to be patient and soon enough we’ll learn what this sucker’s true colors are.
The fact that the market rallied in the face of mediocre quarterly reports and guidance is a good sign.
Although it might just be coincidental, the market did start to take off shortly after the Fed Beige Book was released at 2:00 p.m. The report suggested that the economy was “sluggish”, so that was interpreted by some an indication that the Fed would be more likely to cut interest rates by the November FOMC meeting, and falling interest rates are viewed as a bullish factor for the stock market. That’s the apparent market logic, not mine.
Volume was quite light (1.37 billion shares). Breadth was reasonably positive, with 1.73 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Nortel (NT), EMC (EMC), Intel (INTC), and HP (HPQ), but net buyers of Lucent (LU), Cisco (CSCO), Sun (SUNW), AT&T (T), and Motorola (MOT).
The weekly Mortgage Bankers Association (MBA) Mortgage Applications Survey registered a sharp decline due to a sharp decline in refinancing, but there was a moderate rise in applications to purchase. This was a slightly negative report; bad due to the refinancing decline, but good because of strength in purchases, and mortgage demand still remains near the record high.
The Fed Beige Book for September and early October reported that “economic activity remained sluggish”. This was a negative report, but much as expected. If anything, its broad and balanced scope helped the market by highlighting strengths as well as all the weaknesses that the media has already focused on. Here are some excerpts from the summary: Retail sales were weak… manufacturing activity had declined or grown more slowly… Home building and residential markets were generally upbeat. Commercial real estate markets softened. The agricultural sector was mixed… The energy sector had slowed, and mining activity was uneven. Labor markets were lackluster… Overall wage and price increases were moderate… Most Districts reported strong consumer loan demand and weak commercial lending activity. Credit quality deterioration was reported in some Districts. It is important to note that the Beige Book is not the Fed’s own assessment of the economy, but a summary of the impressions that the Fed gets by talking to businesses in the 12 Fed districts. As such, it’s very possible that the FOMC could take actions that might seem at odds with the Beige Book. In particular, recent comments by various Fed officials have suggested that the economy is in fact growing, if only modestly.
The New York Stock Exchange Margin Debt report for September registered a 2.5% decline to $130.21 billion, the lowest level since January 1998 (although $50 million higher than October 1998). Cash in non-margin accounts at NYSE member firms rose by 6% and cash in margin accounts rose by 3.4%.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 0.10% on Wednesday to 39.38, which is near the top of the very high anxiety zone (35 to 40). It was a bit surprising to see anxiety rise even though the market rallied nicely. Part of the anxiety was due to the market being weak most of the day. It was only later in the afternoon that the market showed some life. This kind of cold/hot trading doesn’t soothe anxiety very well. Although it might just be coincidental, VIX fell sharply when the Fed Beige Book was released at 2:00 p.m. Also, it could be that people really like these gains and are buying ‘put’ options to protect their portfolios from any potential drop.
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 positive tone for the Wednesday evening session, closing up 5.02 points. Quarterly reports and guidance were the usual mix of modestly good, modestly bad, and modestly ugly. Traders seemed satisfied with results from AOL (AOL), LSI Logic (LSI), Amgen (AMGN), et al. LSI rose even though they warned of a significant revenue shortfall in Q4. Evidently, beating consensus earnings by a wide margin and revenues by a moderate margin were enough to trump the guidance shortfall.
[Note: These numbers were calculated at noon, before the Fed Beige Book release.]
Fed funds futures suggest a 29% 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 75% chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed will likely 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 modestly against the yen but rose modestly 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, but is still moderately 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 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.
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.
The UN negotiations continue to drag on, but progress is being made.
[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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No activity.
The weekly unemployment insurance claims report due out this morning will give us yet another clue as to the trend in the labor market.
Once again, the market has some mixed quarterly reports and guidance to digest. It will be quite fascinating to see how the market does with the latest batch.
[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 +27 on Wednesday, well above the 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 10/24/02] The rally is now 10 days old and at its peak. That’s quite 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 24, 2002 12:03:54 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology