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(Will be updated for Monday)
The rally just keeps on going. Part of Friday’s strength could have been short-covering by people who had thought that Thursday’s decline had finally broken the rally. Guess again.
The economic data was mixed (and confusing), but close enough to being benign that people could ignore it. Actually, some of the data was bad enough that people figured that it would put pressure on the Fed to cut interest rates, and any interest rate cut is treated as being bullish for the market.
Volume was fairly light (1.46 billion shares). Breadth was fairly positive (but not fantastic), with 1.81 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO) and EMC (EMC), but net buyers of Sun (SUNW), Flextronics (FLEX), Nortel (NT), Lucent (LU), Motorola (MOT), AT&T Wireless (AWE), and Intel (INTC).
The Durable Goods report for September registered a sharp decline. This was a negative report, but the seasonal adjustment hid a substantial up-tick in the actual orders and shipments. Even with seasonal adjustment, there was a dramatic up-tick in orders for computers and related products. Seasonally adjusted, there was a huge drop in orders for communications equipment, but without the adjustment there was actually a moderate gain. Many media reports pointed out the significant decline for nondefense durable goods, but there was actually a modest gain without the seasonal adjustment. The lousy headline ex-transportation numbers for orders and shipments turn into substantial gains once you remove the dubious seasonal adjustments. The bottom line is that durable goods are in much better shape than the headlines suggested. One reason for this quirky result is that Q3 was far more linear than usual, which is why July spiked so high and September so low. The seasonal adjustment appears designed to boost July and shave September.
The Existing Home Sales report for September registered a moderate gain. This was a positive report.
The New Home Sales report for September registered a moderate gain, to a new record high. This was a positive report.
The final University of Michigan Consumer Sentiment Survey for October rose modestly, but is still down sharply from September. This was a slightly positive report (compared to the initial October report).
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp gain, but its 6-month smoothed growth rate declined modestly. This was a positive report. We can’t attach too much importance to a single report, but the gain was substantial. It will mean a lot more if we see at least three more gains in the next five weeks.
After the close (on Thursday): AMG Data Services reported that for the week ended Wednesday, October 23, $375 million flowed into of equity funds. In fact, since $733 million flowed out of international funds, that means that roughly $1.1 billion flowed into domestic equity funds. This was a positive report. That’s not a large inflow, but at least it is pointed in the right direction. Taxable bond funds reported their first outflows of 2002. $978 million flowed out of municipal bond funds, the second outflow in 11 weeks and largest outflow since February 1997. $5.3 billion flowed into money market funds. Tax-exempt money market funds reported their second consecutive week of outflows. Clearly there is some heavy-duty asset reallocation underway, and that could be very good news for the stock market, if it continues.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 9.10% on Friday to 36.27, which is in the lower half of the very high anxiety zone (35 to 40). That’s quite a dramatic drop in anxiety, but we still have a long way to go. Unfortunately, some traders will view the dramatic decline in VIX as a signal that the market is overbought and ripe for a substantial correction.
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 Friday evening session, closing down 0.42 points, basically flat. As usual for a Friday, there was little net movement in prices.
Fed funds futures suggest a 38% (up from 28%) 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 92% (up from 77%) chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed quite likely to cut rates at the December 10 FOMC meeting.
The apparent weakness in the durable goods report spooked the bond market (even though the stock market was okay with it). I disagree with the bond market assessment since I believe that the seasonal adjustment process is flaky and the unadjusted data tell a somewhat more positive story.
[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 and rose slightly 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 sharply, and is even further below the psychological $30 level. Nominally the decline is due to reduced anxiety over military conflict with Iraq, but it was probably more of a technical shift by traders or possibly even an asset allocation shift by speculators (e.g., from oil futures into stocks). Besides, there really has not been any true shift in war-risk over the past few weeks.
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 sharply.
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.
As of Thursday, Defense Secretary Rumsfeld continued to contend that President Bush has not made a final decision about Iraq.
The U.S. has officially submitted its proposed Iraq resolution to the UN Security Council. This may force the other members to take a stand and either vote for or against it. There is talk that France and Russia have their own versions that might be submitted, but it may be unlikely that the U.S. would accept the watered-down resolutions. There is still room for another compromise. In any case, some resolution will come out shortly, but maybe not for a few days or a week or more.
[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.
Nasdaq just closed above its 100-day moving average, something it hasn’t done since March. We’re also getting close to the point where the 50-day moving average will cross above the 100-day average (a so-called “golden cross”). That will be a crucial point, where traders decide whether there is enough ‘real’ buying to propel the market upwards or whether it’s time to take the market back down for another test. Also, at some point traders would like to see Nasdaq test its 50-day moving average, but that may not happen for a few days or a week when the moving average turns up and is closer to the Nasdaq index itself.
It has been suggested that a fair amount of the recent rally is end-of-month (and quarter and fiscal year) buying related to mutual funds (e.g., window dressing). This is probably true to some extent, but does not likely account for most of the buying. Asset reallocation back into stocks (from bonds, oil futures, gold, currencies, real estate) probably accounts for a lot of the buying. In any case, the real concern is that come November 1, the market could tank as that mutual fund support goes away. On the other hand, November is traditionally a strong month for the stock market. But since October was (so far) a great month, maybe we’re just borrowing from November, so November could be more of a bust or maybe just a minor rally or trading range.
I had no better luck on Friday executing my weekly dollar-cost averaging purchase. And I am loathe to buy into a strong rally day. Maybe the market is trying to tell me something.
…
A huge chunk of Q3 reports are now out of the way. More reports will trickle out this week. But then we head into the first batch of reports for companies whose quarter ended at the end of October. This could bring a new round of warnings or maybe even upside preannouncements. There may be some expectation that October was better than September, at least for some companies.
My forecast for Monday is that Nasdaq will close in the range -30 to +60. Nasdaq came in at +32 on Friday, moderately 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 10/26/02] The rally is now 12 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. We’re now within striking distance of 1350 (only 19 points), so we really need to break through that level this week to stay in the game.
[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 26, 2002 01:34:29 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology