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Microsoft (MSFT) came through and led Nasdaq to a strong rally on Monday. It would have been a stronger close, but one or more of three things happened: day traders led the market higher and then bailed out, people sold into the rally, or comments by Defense Secretary Rumsfeld about a possible imminent call-up of National Guard reserves spooked the market. Note that a continued build-up of U.S. forces in the Persian Gulf region is an absolute requirement (and nothing surprising) if Iraq is to be ‘persuaded’ to conform to UN Security Council resolutions. Of course, traders will tend to sell on any bad news or even news that sounds bad.
Nasdaq had a lot of trouble with the 1420 level. That’s no real surprise and suggests that a significant part of the buying in the morning was due to traders using technical analysis to guide their moves. The 1420 level was a problem for the market back at the peak of the August rally. That said, it was a little too soon for Nasdaq to tackle the 1420 and 1425 levels. But, if Nasdaq can’t break solidly above (and stay above) 1430 by the end of next week, then the staying power of the rally will be called into question.
It is very disappointing that Nasdaq could not close above 1400, but that’s actually okay for a first attempt.
Nasdaq reached it’s closing level barely three minutes after the opening. The entire rest of the day was useless trading. There was very little upwards movement that wasn’t continually interrupted by attempted sell-offs. The morning high (1412) was reached at 10:40 a.m. and not exceeded until 12:10 p.m. The high for the day came at 12:40 p.m. and was followed by a 10-point sell-off that lasted until 1:50 p.m. There was a 7-point rally at 2:25 p.m., but it appears that Defense Secretary Rumsfeld shot that one down 10 minutes later, with Nasdaq falling about 29 points by 3:45 p.m. Luckily there was a nice little 8-point rally in the final 10 minutes of trading. That final push strongly suggests that day traders were busy at work trying to short the rally in at least the afternoon.
Volume was reasonably heavy (2.07 billion shares). Breadth was fairly positive, with 1.72 gainers for each loser. A strong gain on heavy volume is a good sign.
According to Thomson Financial I-Watch, institutional investors were net sellers of EMC (EMC), Intel (INTC), Cisco (CSCO), Nortel (NT), AT&T Wireless (AWE), Lucent (LU), and Qwest (Q), but net buyers of Sun (SUNW) and Motorola (MOT). It’s not much of a surprise to see institutions selling into a strong rally.
The Factory Orders report for September registered a moderate decline, but registered a modest gain ex-transportation. This was a somewhat negative report, but with some positive elements. Both transportation and communications equipment had sharp declines. A major bright spot was that computer equipment actually had a sharp gain in orders. Nondurable orders rose modestly. Note that this report is for September and October is already over.
The Challenger Announced Layoffs report for October register a very sharp rise in announced layoffs, almost to the level of November 2001 (but 27% below October 2001). This was a negative report. These are announced layoffs that may not yet have been implemented. Fortunately, jobs are being created, so net employment can continue to rise despite these additional layoffs.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 1.44% on day to 34.47, which is near the top of the high anxiety zone (30 to 35). It is unusual for VIX to move in the same direction of the market. But since VIX typically indicates the premium that investors are willing to spend on portfolio insurance, the sudden rise of VIX in the final hour and 15 minutes of trading as the market gave up a lot of its earlier gains strongly suggests that people are worried that the rally may have peaked and they want to lock in their gains without dumping their stocks. The news about a possible imminent call-up of the National Guard probably spooked people even more than the rally losing a few points.
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 1.9 points. That’s just a tiny bit of profit-taking after a strong rally and doesn’t even seem to reflect much negativity due to the news that Applied Materials (AMAT) would be laying off more people due to sluggishness in the chip equipment market.
Fed funds futures suggest a 100% (unchanged) chance of a quarter-point rate cut by the November FOMC meeting, plus a 15% (up from 7%) 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, but a half-point cut is rather unlikely.
A Reuters poll on Friday showed that 21 of 22 of primary treasury dealers see a rate cut on Wednesday, with 15 seeing a quarter-point cut, and six seeing a half-point cut. Comments from economists suggested that the cut would be intended as a psychological boost for financial markets and consumers. Other economists simply feel that an “insurance” cut is appropriate given the risks of a sluggish economy.
Fed funds futures suggest a 59% (down from 71%) chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed is somewhat likely to cut rates at the December 10 FOMC meeting, unless the Fed cuts by a half-point in November.
[UPDATED 11/4/02] 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 weak 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 dollar fell modestly against the yen and fell slightly against the euro. Speculators want to take the euro above parity, but there are too many traders willing to sell or short the euro if it does move above parity as it did (briefly) on Friday. Note that changes in interest rates impact the value of a currency, but there is also talk that the main central banks might do a coordinated interest cut on Wednesday, so that really confuses the outlook for speculators.
[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 modestly, and is still well below the psychological $30 level. The earthquake and oil pipeline shutdown in Alaska didn’t seem to phase the oil markets.
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 talk is that the U.S. is putting some finishing touches on the proposed UN Security Council resolution on Iraq so that France, et al can support it. The expectation is that it will be voted on (and approved) by the end of the week.
Defense Secretary Rumsfeld’s comment about a possible imminent call-up of the National Guard should not have been a big surprise. The intense pressure of possible large-scale military conflict is the only thing that will induce Iraq to fully comply with all UN Security Council resolutions. Saddam Hussein does want to survive, so he will do everything necessary (but no more) to avoid his own removal. Any call-up does not indicate that war is imminent or that its odds next year would be any higher. Rumsfled’s comments were actually fairly innocuous and merely in response to a reporter’s question at the regular DoD “News” briefing on Monday. Here’s the relevant excerpt from the transcript, so judge for yourself whether the call-up “news” is a big deal:
Q: Hi. I'm sure there's a good number of National Guard members and Reservists watching the media closely, especially amid reports that the call-up from them might be as large as the one for the Persian Gulf War, if we were to do something with Iraq. Like Charlie, I too know that the president hasn't made any decisions on that, but I'm curious if you could shed any light on the possible timing of such a call-up; whether something like that could begin even before a formal decision by the president, in sort of the guise of -- I mean in sort of the idea of prudent planning, and when we might actually begin to see some movement in that direction?
Rumsfeld: Well, if you think about it, we've called up a great many people already. We've called up over 70,000 men and women in the Guard and Reserve. The numbers have been reduced now to the point of something in the 40,000 to 50,000 range. (Ed. Note: Currently 57,721: See http://www.defenselink.mil/news/Oct2002/b10302002_bt554-02.html.)
Myers: Exactly.
Rumsfeld: And we also have had some stop-losses of people who have not been excused from duty, who otherwise would have been. So there -- an awful lot of those people are volunteers.
There is no question but that we will continue to be making various types of call-ups and -- Reserve and Guard call-ups. We do it as we look at the entire force disposition worldwide. We have folks in Kosovo, we have them in Bosnia, we have them in the Sinai, we have them in a number of places around the world and -- in the Philippines.
There are an enormous number of complicated issues in doing this. And if, for example, you have an activity that involves people who require, oh, 30, 60, 90 days to go do what it is they do, then you might do some of those. If you have people that are on very short calls, you might not. You have to rotate people, and that process is going on continuously.
So I would expect that there would be additional Reserve call-ups in the period immediately ahead, and I would expect also that we may very well continue to let some additional people out who have been in for some period, and we would be replacing them, for example. And it's -- an awful lot of the people, as I say, however, are in voluntarily -- I don't mean "involuntarily." (Laughter.) They are serving voluntarily, even though their units were called up. And those folks, for the most part, are not bracing at getting out right now. So it's a --(Under Secretary of Defense (Personnel and Readiness)) David Chu and the Joint Staff and I have met, I don't know, two or three times, at least --
Myers: Yes, sir. At least three times --
Rumsfeld: -- looking at all of this and trying to do a layout over a period of time as to what we think might be the demands, but I would look for additional call-ups.
Q: When you say "the period ahead" -- this week, by the end of the month?
Rumsfeld: Oh, I wouldn't want to nail that down. But it could be anytime. And it may very well be pieces, scraps, units, elements, activities, capabilities, those types of things.
[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.
Dell has announced that it will launch its own handheld computer, running Microsoft PocketPC, on November 18. It should be an interesting product. For the record, I use a Sony Clie (hi-res monochrome, running Palm OS) that I bought from Dell (10% off, no shipping, no tax, Fed-ex delivery!) last January. It fits comfortably in my shirt pocket. I would love to upgrade to a PocketPC, but if it doesn’t fit (comfortably) in my shirt pocket, I’m not a buyer. The newer Sony with a flip screen and built-in camera seems very appealing, but is rather pricey and too heavy and bulky to fit in my pocket. I’m more interested in a built-in camera than a cell phone since I don’t use or want a cell phone. I would like wireless internet access, but only if the form factor is ‘right’.
Click here for our more extensive commentary on Technology.
People are still digesting all of the legal documents released by the judge on Friday.
[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 still haven’t made this week’s dollar-cost averaging purchase. I may punt unless the market falls off today.
Key events this week are the Fed FOMC meeting, the elections, and Cisco’s (CSCO) quarterly report. Traders may continue to run stocks up in anticipation of these events. But, they may also engage in some serious profit-taking as well. Also, we could see some rallying in anticipation of good news and then a sell off when the news comes out.
Nasdaq did gap up dramatically on Monday, so traders may insist on “filling the gap” (falling) unless there is some renewed upwards momentum.
[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 -50 to +60. Nasdaq came in at +36 on Monday, well 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 11/5/02] The rally is now 18 days old and near its peak. That’s quite impressive. I’ll give the market eight 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 05, 2002 12:53:26 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology