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There was nothing truly noteworthy to pin Thursday’s decline on, so just chalk it up as a little overdue profit-taking.
There was a very distinct “cliff” drop in the market around 1:45 p.m. A briefing.com report at 2:09 said that “traders are attributing the mkt's slide in the last half hour to renewed war fears following Iraq's announcement that it will kick out foreign journalists.” Whether “war fears” were in fact the cause of the drop or merely a convenient excuse, the bottom line is that the market was stagnating for most of the day, with nothing to really push it up, so traders switched and tried to push it down. Any excuse would have worked in that environment.
It was a bit disappointing that the good unemployment claims report didn’t give the market more of a boost, but the market has effectively priced in an expectation that economic reports will start showing a positive trend.
Volume was relatively light (1.68 billion shares). Breadth was only modestly negative, with 1.13 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), Nextel (NXTL), Nortel (NT), and JDS Uniphase (JDSU), but net buyers of Sun (SUNW), Lucent (LU), AT&T Wireless (AWE), EMC (EMC), and Motorola (MOT).
The Unemployment Insurance Weekly Claims report registered a sharp decline in both initial and continuing claims. This was a positive report, but the moving average of initial claims is still slightly above the 400,000 threshold which indicates that employment is not growing very much. The 4-week moving averages of both initial and continuing claims fell moderately. The bottom line is that the labor market is still quite lackluster, but not deteriorating significantly.
The Mass Layoffs report for September registered a moderate decline in both the number of mass layoff events (more than 50 people) and number of workers affected by those mass layoff events, to the lowest levels since October 2000. This was a positive report. There is a lot of volatility in these reports, but both August and September were well below recent levels.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 1.32% on Thursday to 39.90, which is near the top of the very high anxiety zone (35 to 40). People acted as if the market decline was just a modest amount of profit-taking.
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 Thursday evening session, closing down 2.71 points. The after-hours news wasn’t particularly disappointing, but people are just getting anxious that the market may stop being so tolerant of mediocre news.
Fed funds futures suggest a 28% (down from 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 77% (up from 75%) chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that 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 very slightly 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 rose slightly, but 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.
The hostage situation in Moscow is disturbing, but has no global impact.
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 FBI issued an alert suggesting that al Qaeda may target passenger trains, but it’s a vague, general alert. I’m sure that al Qaeda wants to attack all sorts of targets, but there are probably a very limited number of the terrorists left here in the U.S., so they can’t afford to do much that would be high profile and risk uncovering those that remain. They may in fact prefer to wait until their leader gives them a strong signal. We don’t know if bin Laden is dead or alive, so they may not know either. If there were bigger plans afoot, the sleepers may be trained to wait patiently for bin Laden to send a specific signal rather than waste their limited resources and manpower on low-payoff targets.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
Negotiations over the UN Security Council resolution continue.
Iraq is expelling some, but not all, foreign journalists and will supposedly have new rules for when some of them may be allowed back and for how long. Iraq appears to be upset about recent coverage of some protests. Also, there was a recent article which detailed numerous examples of how Iraq tries to keep the foreign journalists under control. None of this is a terribly big deal, and it is certainly not an indication that armed hostilities are imminent, which was one of the rumors in the market in the middle of the afternoon.
[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.
…
I put in an order just before the close for by weekly dollar-cost averaging program, but my limit order was just a nickel too low, so it didn’t fill. Oh well, I’ll have to try again today.
Once again, we have some mediocre quarterly reports (or guidance) to digest. It will be quite fascinating to see how the market does with the latest batch.
There are a couple of economic reports that might “move the market” today, but nothing too dramatic.
Today is a Friday, so traders will tend to close out positions ahead of the weekend. That could cause either a small rally or sell-off depending on who is more afraid of the risk of their positions.
[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 -30 to +60. Nasdaq came in at -22 on Thursday, well above the lower end 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 10/25/02] The rally is now 11 days old and only moderately off its peak. That’s quite 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 25, 2002 12:26:07 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology