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Finally, Nasdaq was able to break above the peak of the August rally as well as the Nasdaq low-point last fall. The combination of HP (HPQ) and a solid unemployment claims report did the trick. Now the question is whether the gains will stick. Undoubtedly a significant portion of the gain was due to short-covering.
Volume was quite heavy (2.4 billion shares). Breadth was quite positive, with 2.16 gainers for each loser. This was a real rally, with a big gain on heavy volume.
According to Thomson Financial I-Watch, institutional investors were net sellers of Intel (INTC), Cisco (CSCO), Nortel (NT), HP (HPQ), Sun (SUNW), EMC (EMC), and Qwest (Q), but net buyers of AMD (AMD) and AT&T Wireless (AWE). Clearly these guys were doing a bit of “sell into the rally”.
The Unemployment Insurance Weekly Claims report registered a sharp decline in initial claims, a sharp decline in continuing claims, a modest decline in the 4-week moving average of initial claims, and a moderate gain in the 4-week moving average of continuing claims. This was a positive report. The unadjusted, actual initial claims registered a very sharp decline, and the unadjusted continuing claims registered a moderately sharp decline. We shouldn’t get too excited since the data tends to be very volatile and frequently revised, but we’re certainly not looking at data that would suggest a double-dip recession. It is also worth nothing that the Veterans Day holiday may have reduced claims, temporarily.
The Chicago Fed National Activity Index for October registered a moderate decline and has been negative (meaning that activity is below potential, but not necessarily contracting) for three consecutive months. This was a negative report.
The Philadelphia Fed General Business Index for November registered a sharp gain and is positive again. This was a positive report. Shipments went from negative to slightly positive. New orders went from negative to moderately positive. Unfilled orders continued to contract, but at a slower pace. Employment continued to contract. Unfortunately, the six-month outlook deteriorated modestly.
The Conference Board Leading Economic Indicators for October registered no change after four consecutive months of decline. This was a neutral report, but was somewhat positive since it does suggest stabilization after a period of weakness.
After the close: The SEMI Chip Equipment report for October registered a modest gain (0.99%) in sales (billings), a moderately sharp decline (7.9%) in orders (bookings), and a moderate decline (8.75%) in the book-to-bill ratio to 0.73 which is now well below 1.0, indicating that future revenues will be substantially lower than in October. This was a negative report, but not entirely unexpected since industry leader Applied Materials (AMAT) had already told us that they expect a 20% decline in revenues this quarter.
After the close: AMG Data Services reports that for the week ended Wednesday, November 20, $2.2 billion flowed out of equity funds. This was a negative report. This means that much of the recent gains were not due to patient retail mutual fund investors, but were probably mostly ‘hot money’ from institutional investors, hedge funds, and self-directed individual investors who may not have much of a commitment to hang in there if the market begins to decline. $1.3 billion flowed into taxable bond funds. $192 million flowed out of municipal bond funds. $39.1 billion flowed into money market funds.
The NYSE Margin Debt report for October registered a modest rise in margin debt. This was a positive report since very little of the October rally came as a result of people taking on more margin debt. Margin debt rose by 0.28%. Cash in cash accounts at brokerage firms fell by $770 million to $66.78 billion. Cash in margin accounts at brokerage firms fell by $2.01 billion to $96.62 billion. This shows retail investors beginning to put some money to work. It also shows that much of the October rally was not due to retail investors.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 4.50% on Thursday to 27.37, which is just below the midpoint of the moderately high anxiety zone (25 to 30). People were clearly comforted by the strength of the rally, but that sentiment could turn on a dime unless the rally continues to hang in there.
Some traders will be screaming bloody murder that the rapid fall in VIX indicates an excess of over-confidence, constitutes a short-term over-bought technical condition, and suggests that some dramatic profit-taking is in order.
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 Thursday evening session, closing down 7.42 points. People probably think the rally came a little too far too fast, the outlook from Brocade (BRCD) was a bit gloomy, and the weak SEMI chip equipment report spooked people as well.
Fed funds futures suggest a 12% (down from 18%) 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 10% (down 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 slightly 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 was unchanged.
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. Israel will undoubtedly respond to the latest suicide bombing, but there will probably be little change in the overall situation.
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 waiting game continues. The first actual inspection is planned in five days.
[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.
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No activity.
A bit of profit-taking would certainly be in order, but there may be a lot of interest in trying to push the rally for as long as it goes.
The weak SEMI chip equipment report will weight on the market to some extent, but may have been anticipated due to the recent warning from Applied Materials. Besides, sometimes a hot market rally will continue even in the face of negative news.
It’s a Friday, so traders will tend to close out positions in advance of the weekend. Also, since next week is Thanksgiving week, trading should be very light, and many traders may either take the entire week off, or at least scale back their positions. Growing anxiety over the resumption of Iraq weapons inspections next Wednesday could also weigh on the market.
Ultimately, people must decide whether they think it’s time to bail out and take their profits, or whether the rally has a ways to go.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +48 on Thursday, 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 11/22/02] The rally is now 31 days old and still strong. 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). Nasdaq has managed to close above 1350 for seven days, but we need to stay up there for at least another three days before we can start to have real confidence in the rally again. Nasdaq has closed above 1400 for two days, but needs to stay above that level for another five days. Now that Nasdaq finally was able to break above 1420/1425, it simply needs to stay there for at least a week. Remaining 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 11:32:09 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology