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It is truly amazing how this rally just keeps on going.
There were a number of possible reasons for the market gain on Friday. First, economic data that was not as bad as feared. Second, short-covering by short-term traders who had bet earlier in the week that the rally would fall apart, and then had to pay a heavy price to get out ahead of the weekend. Third, anticipation that weak economic data will force the Fed to cut interest rates at the Tuesday FOMC meeting. And finally, anticipation that the Microsoft antitrust judgment would be favorable.
Volume was light (1.589 billion shares). Breadth was quite positive, with 2.11 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), Intel (INTC), EMC (EMC), and Nextel (NXTL), but net buyers of Sun (SUNW), Oracle (ORCL), Lucent (LU), Nortel (NT), and Motorola (MOT). It may be a good sign when institutions are buying with the rally rather than selling into the rally.
The Employment Situation report for October registered a modest decline in non-farm payroll employment. This was a somewhat negative report, but the market had feared worse due to recent gains in unemployment insurance initial claims. This report was not as weak as it seemed. The decline in September was revised to a significantly smaller decline. Once we strip off the unreliable seasonal adjustments, we find that non-farm payroll employment rose by 567,000 versus the headline decline of 5,000. Unadjusted employment in the household survey rose by 174,000 versus a decline of 271,000. Most significantly, unadjusted unemployment declined by 43,000 versus a gain of 117,000. The unadjusted unemployment rate declined by 0.1 to 5.3% versus the adjusted gain of 0.1 to 5.7%. There were 534,000 more people unemployed in October than in October 2001. The population has grown by 2.062 million over the past year. The total civilian labor force has grown by 874,000. Total employment has grown by 339,000 over the past year, including the dramatic declines last fall.
The Construction Spending report for September registered a moderate gain. This was a positive report, especially considering that the gain was significantly larger than expected.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a moderate decline. This was a negative report. The six-month smoothed growth rate was unchanged, but is still moderately negative, indicating potential weakness in the months ahead.
The Personal Income and Spending report for September registered a moderate gain in income, but a moderate decline in spending. This was a mixed report, positive for income, but negative for spending. The good news is that consumers saved a hefty chunk of their income in September, which leaves them in a financially healthier position. The bad news is that consumer spending was weaker than expected. Note that this report does not cover the most recent month.
The ISM Manufacturing Index for September came in moderately below breakeven (50.0), indicating that the manufacturing sector contracted in September. This was a negative report, but not as bad as people had feared. Note that this report does not cover the most recent month.
The Semiconductor Billings report for September registered a moderate gain in global chip sales. This was a positive report, but some people had expected a larger gain. All regions of the world posted gains. Note that this report does not cover the most recent month.
The Vehicle Sales report for October registered a sharp decline. This was a negative report, but vehicle sales tend to be very volatile with negligible long-term trend.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 5.37% on Friday to 33.98, which is in the upper half of the high anxiety zone (30 to 35).
Some traders may feel that VIX has fallen too far too fast, suggesting an excess of over-complacency and that the rally might be ripe for a correction. Still, VIX does indicate a significant level of anxiety in the market.
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 strongly positive tone for the Friday evening session, closing up 15.8 points. The Microsoft judgment was a strong catalyst even though it doesn’t directly affect many other companies.
Fed funds futures suggest a 100% (unchanged) chance of a quarter-point rate cut by the November FOMC meeting, plus a 7% (up from 0%) chance of a half-point cut. In other words, futures indicate that the Fed will almost certainly cut rates at the November 6 FOMC meeting.
Fed funds futures suggest a 71% (up from 65%) chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed is likely to cut rates at the December 10 FOMC meeting, unless the Fed cuts by a half-point in November.
[UPDATED 11/2/02] I stick to my forecast that the Fed will hold interest rates steady through the Fall election (November 5), but now concede that there is a 67% chance that the Fed will cut rates at the November 6 FOMC meeting. The economy is not weak enough to need any more rate cuts, but the psychology of consumers, businesses, and the financial markets is week enough that the Fed may feel compelled to cut rates simply to improve psychology. The psychology argument would also suggest the possibility of an aggressive half-point cut. Additional rate cuts will not have any fundamental effect on the economy in the near-term (next few months) other than spurring additional buying of homes, but would help psychology. It would be better if the Fed did not cut rates at all, but the members of the FOMC may feel that they don’t want to be blamed for continuing sluggishness of the economy. They sometimes make an “insurance” cut that is not absolutely needed, but assures that they will not be blindsided by any further economic weakness. Unfortunately, the Fed will probably have to begin raising rates in the Spring, so another rate cut may cause them problems at that time. The Employment Situation report due out today may be the determining factor for the Fed.
The dollar fell moderately against the yen and fell sharply against the euro. The greater chance of a Fed rate cut led speculators to place a lower value on the dollar.
[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 moderately, but is still well 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 strongly.
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.
People still expect that a deal is near on the UN Security Council Iraq resolution and it will probably happen within a couple days after the U.S. elections.
[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.
As I have long expected, the decision in the Microsoft antitrust trial places a number of moderate restrictions on Microsoft, but does not hobble them in any extreme manner. It won’t be business as usual, but there is nothing onerous for shareholders to worry about. There is still a strong possibility that the decisions could be appealed. Unfortunately, there is also a European Commission effort and a number of private lawsuits that will continue to dog the company. The main suits pending are the Sun, Netscape (AOL), and “California Plaintiffs” cases.
[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.
Microsoft is expected to be quite a catalyst for the market today, but it’s also possible that that trading will start out strong and then peter out and possibly even reverse. But if the initial rally is strong enough, then a whole new wave of short-covering will kick-in and nobody will want to be on the short side of this monster.
[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 +31 on Friday, 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 11/2/02] The rally is now 17 days old and at its peak. That’s quite impressive. I’ll give the market seven 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). Now that Nasdaq has broken above 1350, it will have to stay above that level for at least a week before people will be willing to suggest that this rally has staying power, and that would just be the next step. The 1400, 1425, and 1450 levels will be significant tests for this rally. Nasdaq will need to break above 1450 within the next three weeks and stay there for a week before we can cautiously talk of a real chance of a new bull market.
[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: November 02, 2002 01:28:16 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology