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Tuesday was yet another lackluster trading day with no real important news to guide the market. The moderate decline was simply the burning off of short-term momentum traders as well as the piling-on of short-sellers.
We are beginning to get to a short-term technically oversold situation.
There was little buying since most people are waiting for the market to stop falling.
Volume was light (1.6 billion shares). Breadth was moderately negative, with 1.35 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net buyers of Oracle (ORCL), Cisco (CSCO), Sun (SUNW), EMC (EMC), Nortel (NT), Intel (INTC), AMD (AMD), AT&T Wireless (AWE), and Lucent (LU). Institutions clearly saw Tuesday as a buying (or short-covering) opportunity.
The weekly Bank of Tokyo-Mitsubishi (BTM) Chain Store Sales Index registered a sharp decline, erasing most of the gains of the prior two weeks. This was a negative report, but there does tend to be a lot of weekly volatility.
The weekly Reuters Instinet Redbook Research National Retail Sales report registered a slight gain compared to the same week one month ago. This was a slightly positive report. According to the report, “most discount stores continued to report consistent business... By contrast, most department stores said business was volatile, hard to forecast and slow overall.”
The Consumer Price Index (CPI) for October registered a modest gain, even ex food and energy. This was a positive report, showing not only that inflation is tame, but that deflation is non-existent.
The U.S. International Trade in Goods and Services report for September registered a modest decline in the trade deficit, with a modest decline in exports and a larger decline in imports. This was a slightly positive report, but too meager to be very satisfying.
The National Association of Home Builders (NAHB) Housing Market Index for November registered a modest gain to its highest level in two years, with gains in all three components: current single-family sales, six-month forecast for sales, and traffic of potential buyers. This was a positive report.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a moderate gain to -17 from -19 (out of a range from -100 to +100), the fourth consecutive week of improvement. This was a positive report. There was a 1% gain in how people view the overall economy, a 2% gain in how consumers view their own finances, but no change 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, rose by 0.80% on Tuesday to 31.36, which is in the lower half of the high anxiety zone (30 to 35). Anxiety is rising incrementally, but not by enough to suggest that people are ready to give up on the current rally.
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 positive tone for the Tuesday evening session, closing up 0.78 points. People believe that the sell-off was overdone, but given the fierceness of recent negativity, people are reluctant to stick their necks out too far, yet.
Fed funds futures suggest a 15% (up from 9%) 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 14% (up from 12%) 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 rose moderately sharply 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 fell modestly, and 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 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.
Everybody is anxiously waiting for something, anything to happen on the inspections front.
The head of the IAEA (responsible for inspections for nuclear weapons) says that Iraq has been cooperative so far and Iraq has pledged to meet the December 8 deadline for disclosure. But Iraq continues to maintain that everything that it had developed has been destroyed. That will put the onus on the U.S. to go public with intelligence that may contradict the Iraqi claims. Then we will see how Iraq reacts to hard evidence, and then we will see how the U.S. reacts to Iraq’s response. Unfortunately for the U.S., a lot of the best intelligence is word of mouth and documents from defectors, and Iraq can simply respond that such programs have been terminated and the materials destroyed.
President Bush implied that any war with Iraq is not imminent since “we're not close to that decision point yet because we're just beginning the process of allowing Saddam the chance to show the world whether or not he will disarm.” That comment implied that the U.S. intends to give Iraq a fair amount of rope.
[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.
Qwest (Q) has said that it will have troubling servicing debt in 2004, but now is proposing a debt swap to shift that shorter-term debt into longer-term debt. This doesn’t really solve their long-term debt problem, but does indicate the extent to which the telecom companies will have to engage in financial engineering simply to stay afloat.
Click here for our more extensive commentary on The Telecom Problem.
I attended a presentation on terrorism by David Trimble, head of the Northern Ireland Assembly (and recipient of the 1998 Nobel Peace Prize) at the American Enterprise Institute here in DC. The title for the presentation was “Fighting Terror and Winning”. A lot of valuable lessons have been learned from the conflict in Northern Ireland, some of which can be applied to other forms of terrorism. Unfortunately, there are enough key differences from the situation with al Qaeda, Palestinian terrorists, Iraq, and terrorists in Southeast Asia as to limit the applicability of lessons from one area to the other areas. One lesson from Northern Ireland that may help limit a worsening of terrorism in other areas is that enhanced economic opportunity lessens the appeal of terrorism. Economic despair is a surefire breeding ground for terrorism.
I also attended a presentation on the recent evolution of intellectual property law by Court of Appeals Judge Richard Posner at the American Enterprise Institute. Judge Posner is also a professor at the University of Chicago Law School. He had attempted to mediate in the Microsoft antitrust case back in the days of Judge Jackson. He gave a good overview of how intellectual property rights (patents, trademarks, and copyrights) have evolved and expanded dramatically ever since the Copyright Act of 1976. The expansion of IP rights came in parallel with deregulation and was a natural extension of the interest in protecting property rights in general.
No activity.
The name of the game for the past couple of days has basically been “Gee, the market is weakening, so just wait for the weakening to finish, and then buy back in”. The reason the market will snap back is that there are probably a bunch of short-sellers who keep piling on, and they will have to cover their shorts once the market loses downwards momentum and long traders begin to itch for a little upwards momentum.
It really feels like the market should go up today or real soon since it is a little oversold on a short-term technical basis. People wanted to do a little profit-taking, and now that appears to be completed.
It’s also possible that we could see the market weaken in the morning and then to bounce up strongly after we reach a level of “selling exhaustion”. That also corresponds to the point where short-term short-sellers figure that their luck is running out.
The market will be trying to anticipate HP’s (HPQ) quarterly report which is due after the close. Nobody expects great results or a great outlook, but we do expect to hear how the merger with Compaq is faring and the outlook for the PC, server, storage, printer, and handheld computer markets.
The weekly mortgage applications report and monthly new residential construction report will give us some clues about the housing market.
My forecast for today is that Nasdaq will close in the range -30 to +60. Nasdaq came in at -19 on Tuesday, 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 11/20/02] The rally is now 29 days old, although a bit ragged once again. 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 has managed to close above 1350 for five days, but we need to stay up there for at least another week before we can start to have real confidence in the rally again. Nasdaq has been under 1400 for two days. Nasdaq 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 19, 2002 11:59:41 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology