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Tuesday was probably simply a technical bounce due to the market being in a short-term technically oversold condition. The economic data was good, but it doesn’t seem that the market was paying much attention to it. The bounce would have been stronger, but a report of a new bin Laden tape spooked the market at least a little. That degree of spooking is typical of a rally based on short-term traders rather than business fundamentals or ‘real’ buying.
Nasdaq struggled with the 1350 level, and failed to break strongly above it. That’s not a good sign, but it’s not fatal, yet.
The good news was that the market seemed to have moved beyond worrying too much about Iraq.
Volume was quite light (1.57 billion shares). Breadth was fairly positive, with 1.71 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), Sun (SUNW), Oracle (ORCL), Intel (INTC), Nextel (NXTL), and Applied Materials (AMAT), but net buyers of Nortel (NT).
The Bank of Tokyo-Mitsubishi (BTM) Weekly Chain Store Sales Snapshot registered a moderate gain, for the second consecutive week. This was a positive report. Cold weather spurred apparel demand. There was also strong demand for home furnishings, fine jewelry and electronics.
The weekly Reuters Instinet Redbook Research National Retail Sales Index registered a moderately sharp gain compared to the same week a month ago. This was a positive report. There were strong sales of winter clothing, home furnishings, jewelry, and electronics goods.
The Kansas City Fed Manufacturing Survey for October registered a moderately sharp improvement. This was a positive report. Production reversed its September decline. The volume of new orders reversed the September decline. The average workweek remains stable, but employment contracted at a faster pace. The main negative was that the volume of shipments fell to its lowest level in many months, but that may simply have been due to the decline of orders in September. The best news was that the six-month production outlook rose to the highest level since April.
The Richmond Fed Manufacturing Survey for October registered a moderately sharp improvement. This was a somewhat positive report, but significant weaknesses remain. Shipments rose from a moderate rate of contraction to a modest ratio of growth. Unfortunately, new orders contracted. Also, the backlog of unfilled orders continued to contract at a rapid pace, but slower than in September. The six-month shipment outlook declined slightly, but is still moderately optimistic. Manufacturing employment continued to contract.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a modest gain to -19 from -20 (out of a range from -100 to +100), the third consecutive week of improvement. This was a positive report. There was a 1% gain in how people view the overall economy, but no change in how consumers view their own finances, and a 1% gain in how consumers view the buying climate. As usual, consumer confidence reports are not leading indicators.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 1.99% on Tuesday to 35.39, which is slightly above the bottom end of the very high anxiety zone (35 to 40). People liked the rally, but it did not truly inspire them into buying into the idea that the rally would continue strongly.
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 mixed tone for the Tuesday evening session, closing down 0.53 points, basically flat. People are not ready to truly believe that the rally will continue.
Fed funds futures suggest a 9% (unchanged) chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the December 10 FOMC meeting.
Fed funds futures suggest a 24% (up from 20%) chance of a quarter-point rate cut by the January FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the January 28/29 FOMC meeting.
The dollar fell slightly against the yen and 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 moderately, but is 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 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.
We have yet another alleged bin Laden audiotape that refers to recent terrorist attacks, so it most definitely is a recent tape. There is talk that U.S. officials are confident that it is bin Laden’s voice on the tape. Even if alive, the fact that he is no longer confident enough to do any more videotapes strongly suggests that his operations are severely curtailed. Maybe he’s changed his appearance, but that only reaffirms that he has lost confidence. That loss of confidence will filter out into the cells of his followers and significantly diminish their ability to conduct much more than smaller, isolated attacks. It’s a little bothersome that unnamed officials jumped in to confirm the tape’s authenticity even before the experts had finished their technical analysis. That suggests that maybe they had a political or strategic motive for their too-fast comments. A CNN QuickVote poll showed that 54% of 13,333 respondees questioned the authenticity of the tape.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
There were more tough words on both sides and more waiting, but no change to the expected outlook of Iraq agreeing to renewed inspections.
The unanimous rejection of the UN resolution by the Iraqi Parliament was a slight surprise, but a meaningless gesture since Saddam Hussein will make the decision by himself. His son Uday, who controls the Iraqi media, actually recommended that the resolution be supported. This whole episode was simply useless drama.
The purchase of potential nerve agent antidote by Iraq may simply have been a disinformation ploy to try to dissuade the U.S. from attacking Iraq by appealing to general U.S. public fears of anything having to do with chemical, biological, or nuclear weapons.
[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.
The judge has formally accepted the amended antitrust settlement. Just about all of the terms are already in effect, so there is not really much in the way of additional impact on the company’s business. The non-settling states still need to decide whether to accept the judge’s separate final judgment in their litigated side of the case or whether to appeal.
[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.
Toshiba announced plans to increase flash memory chip production by September 2003 due to “brisk demand” for memory chips for camera-equipped cell phones and digital cameras. At least one sub-sector of techland is showing some signs of life.
No activity.
The market is still sitting in a short-term technically oversold condition, so a continuation of the bounce is in order, subject to any bad news or any ‘real’ selling.
It will be interesting to see if the market can continue to refrain from obsessing on Iraq.
There is still the possibility of additional asset reallocation out of dollar-denominated assets due to the dramatic Fed rate cut, but that may already be finished or may be balanced by modest inflows to mutual funds.
My forecast for today is that Nasdaq will close in the range -30 to +60. Nasdaq came in at +30 on Tuesday, 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 11/13/02] The rally is now 24 days old, but looking a little ragged. 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). The fact that the 1350 level did not hold up is a bad sign, but not fatal. Nasdaq needs to move back above 1400 within a couple of days. Nasdaq also needs to break above 1420/1425 within two weeks and stay there for a week. Gaining – and keeping – the points to get us above the peak of the August rally will be both quite a struggle and quite a milestone. The real stumbling block is 1423.19, which was the closing level on September 21, 2001 and marked the “bottom” that year. Trying to break above the bottom from below is technically very difficult. This has nothing to do with economic fundamentals, but in a market where people are quite anxious, the behavior of traders guided by technical analysis is a driving force until some more ‘real’ buyers step in.
[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 11/9/02] The ECRI Weekly Leading Index (WLI) tells us that the economy is starting to pick up a little. Not enough to make people happy, but enough to offer encouragement that neither a double-dip recession nor deflation are in our cards.
[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 11/7/02] I’ve decreased my estimate of the probability of a double-dip recession to 10% (from 20%) due to hefty half-point Fed rate cut. 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 11/11/02] I don’t yet have a forecast for Q4 GDP. The accounting is so inscrutable as to defy any rational forecast. People expect economic activity to slow dramatically from the pace of Q3, so real GDP growth in the range of -0.5% to 2.5% (midpoint is 1.0%) is possible. Actually, a survey of economists by The Economist shows an expectation for real GDP growth in 2002 of 2.4% (low of 2.3 to 2.6), which implies Q4 GDP growth of 0.2% (low of -0.2 to 1.0). The same survey forecast real GDP growth of 2.7% in 2003 (low of 2.1 to 3.3). There was no hint or suggestion of deflation in these survey results.
[UPDATED 11/8/02] The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is still uncertain whether the recession truly ended of whether the end was merely temporary with a second dip to follow. In their words (as of November 5), “The behavior of the economy in the first eight months of 2002 indicates that the decline in activity that began last year may have come to an end. But recent data indicate that additional time is needed to be confident about the interpretation of the movements of the economy last year and this year.”
[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 13, 2002 12:57:15 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology