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Wednesday was just one of those momentum days where a little snowball starts rolling down the hill and gathers momentum as the day progresses. The market had very little momentum at the open, but the combination of being oversold on a short-term technical basis and the lack of any strong selling interest caused a little momentum to develop, and that inspired some short-covering, and all that fed on itself. There may have been some amount of ‘real’ buying that kept the momentum going, plus some people who were afraid that the train was finally leaving the station.
Volume was moderate (1.76 billion shares). Breadth was quite positive, with 2.19 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), Sun (SUNW), Qwest (Q), JDS Uniphase (JDSU), Intel (INTC), Applied Materials (AMAT), Oracle (ORCL), but net buyers of AMD (AMD) and Nortel (NT). Clearly institutions thought the rally was a bit excessive.
The weekly Mortgage Bankers Association (MBA) Mortgage Applications Survey registered a sharp gain, with a moderate gain in applications to purchase, and a very sharp gain in refinancing. This was a positive report. Clearly the Fed rate cut inspired a lot of people to pursue refinancing.
The New Residential Construction report for October registered a sharp decline in housing starts, a moderate decline in completions, but a modest gain in housing permits. This was a negative report and significantly worse than expected, but may have been due to one-off issues, especially since mortgage applications to purchase are still strong and the NAHB housing survey is still very strong. The bottom line is that the decline is a concern, but not a deal-breaker. Note that this report covers multi-unit apartment buildings as well as single-family homes.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 8.61% on Wednesday to 28.66, which is in the upper half of the moderately high anxiety zone (25 to 30). VIX hasn’t been this low since the middle of June. I’m not sure why people feel so much less anxious all of a sudden, but it may just be relief that the rally keeps hanging in there.
Some traders will consider the sharp decline in VIX to be a short-term contrarian bearish indicator, indicating an excess of over-confidence, and suggesting that the market could decline.
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 Wednesday evening session, closing up 10.92 points. People were very relieved that HP did as well as they did and didn’t have worse news to report.
Fed funds futures suggest an 18% (up from 15%) 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 12% (down from 14%) 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 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 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 fell moderately.
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 wait for inspections to shift into gear continues.
The U.S. is making a big deal about U.S. forces training in Kuwait. This is not a sign of imminent hostilities, but a reminder to Iraq that the U.S. is really serious about taking military action if the new inspection and disarmament process fails to be effective. It may also be a bit of disinformation to try to lead Iraq into believing that the initial thrust of any UN attack would come from Kuwait so that Iraq will mis-position its limited military forces.
Iraq continues to shoot at our planes in the no-fly zones and we continue to bomb them back. The administration continues to point out that Iraq’s actions may be technically in violation of the UN resolution(s), but even the British admit that technically the previous UN resolutions did not specifically authorize our over-flights. It is a gray area, but even with a strict interpretation (by U.S. terms), the shooting (which causes no damage to our planes) is too minor to trigger a massive military response.
Overall, things in Iraq are going as well as we could hope for in this type of situation. There is still an excellent chance that the situation can be resolved peacefully, but even if war does become necessary, it should be quite manageable and Americans and the market are ready for it. It is truly amazing how rock solid the will of the average American is these days. But I do have mixed feelings about the media and their inability to separate their own self-interest from the interests of America and Americans. In some sense, 9-11, as horrible as it was, was a blessing since it helped to fortify Americans for whatever lesser difficulties may come our way.
[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.
I attended a panel discussion on the topic of expensing of options at the American Enterprise Institute here in DC. The moderator was Howard Gleckman of BusinessWeek magazine. It was a lively discussion that walked through most of the arcane issues related to trying to properly account for employee stock options. It is clear that no known approach is without flaws. Even now, new approaches are under development. The basic problem is how to properly value a future outcome when the future is so uncertain. Ultimately, companies, Wall Street, and investors will be able to live with whatever proposal gets accepted. Even if tech companies have to take a huge hit to ‘earnings’, everybody will just wink and treat the ‘adjustment’ as a one-time event or yet another special line in the income statement that may or may not be ignored. Most people can live just fine with GAAP and pro-forma earnings, so yet another quirk is not really a big deal once we all get over the reluctance to change the status quo.
I also attended a panel discussion on current issues for charter schools at the American Enterprise Institute. Improvements to our primary and secondary education system are sorely needed, and charter schools are one approach that is working. Not all charter schools are successful, but there are waiting lists at 75% of them. Parents really do like the choice, especially for districts with “failing schools”. Although there are plenty of “enemies” of charter schools and many hurdles they have to jump through, there are also many opportunities for entrepreneurs who either want to start new schools or offer products and services to them. We’re kind of at a crossroads where the pace of new school openings has slowed dramatically (maybe due to the slow economy), even as there is significant unsatisfied demand.
No activity.
The market will get a chance to react to HP’s quarterly report (fairly decent) and outlook (not so hot, but not falling off a cliff either), although you could argue that the market rallied a bit too strongly into HP’s report. Still, the market could rally in relief that HP didn’t have a worse report.
Nasdaq is now poised just under the 1420 level as well as being just a few points under 1423.19 which was the closing level on September 21, 2001 and marked the “bottom” that year. It will be difficult for the market to break though and sustain these levels, but it’s bound to happen one of these days. The market could get skittish again and pull back short of this area of “congestion”. Or, we could leap above the congestion for a short while before falling back to wait for yet another day. What we need is to leap far enough above the level so that enough additional buying is inspired to keep us above the level even after a fair amount of profit-taking. Until we get above 1525, the 1420/25 level will not be safely behind us. Unfortunately, we need more ‘real’ buyers to step into the game to push up much further.
The weekly unemployment insurance claims report will give us some more clues on the labor market. The economy is still sluggish enough that we will occasionally see weeks when unemployment rises more than feels comfortable for a recovery.
My forecast for today is that Nasdaq will close in the range -30 to +60. Nasdaq came in at +45 on Wednesday, 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 11/21/02] The rally is now 30 days old and starting to perk up again. 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). Nasdaq has managed to close above 1350 for six days, but we need to stay up there for at least another four days before we can start to have real confidence in the rally again. Nasdaq managed to close above 1400 again, but has had trouble sustaining such gains. Nasdaq needs to break above 1420/1425 within a week 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 21, 2002 12:18:28 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology