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Nasdaq started out Monday with a fairly neutral, but slightly positive bias, but quickly rose as it became clear that there was no major selling interest. The good home sales report inspired further buying, but the buying quickly petered out and switched to profit-taking. Given the dramatic recent run-up, more profit-taking would be expected, but very little materialized. Even at its ‘worst’ level of the day at 12:30 p.m., Nasdaq was down barely 8 points. From there, Nasdaq rallied almost straight up into the close. The gain for the day was not dramatic, but the virtually complete resistance to any significant profit-taking was quite impressive.
Volume was moderately heavy (1.94 billion shares). Breadth was reasonably positive, with 1.54 gainers for each loser. Volume was surprisingly strong for a holiday week.
According to Thomson Financial I-Watch, institutional investors were net sellers of Intel (INTC), Sun (SUNW), Nortel (NT), Qwest (Q), Lucent (LU), Oracle (ORCL), Brocade (BRCD), and EMC (EMC), but net buyers of Cisco (CSCO). Institutions were doing a little selling into the rally, which is their typical behavior.
The Existing Home Sales report for October registered a sharp rise in existing home sales and a moderate gain in existing home prices. This was a positive report.
The Bankruptcy Filings report for Q3 registered a modest rise in personal bankruptcies compared to the previous quarter, although a sharp rise compared to a year ago, and moderate decline in business bankruptcies for the third consecutive month. This was a positive report. Although the absolute level of bankruptcies is somewhat high, the pace is clearly moderating, especially for businesses. Chapter 7 and Chapter 11 bankruptcies declined, but Chapters 12 and 13 rose.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 0.82% on Monday to 26.95, which is in the lower half of the moderately high anxiety zone (25 to 30). Although the market closed higher, it was a very tentative day of trading, leading people to believe that they need to be a little more careful about trusting the durability of the 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 negative tone for the Monday evening session, closing down 2.47 points. People are a bit worried that the rally is somewhat over-extended. Warnings from Tech Data (TECD) and Semtech (SMTC) added to anxiety, but really only confirm the current view of the slackness of Q4.
Fed funds futures suggest a 15% (up from 12%) 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% (unchanged) 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 moderately sharply against the yen but rose moderately sharply 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.
[UPDATED 7/23/02] 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 moderately sharply, and remains well below the psychological $30 level.
[UPDATED 7/23/02] 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 sharply.
[UPDATED 7/23/02] In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[UPDATED 7/6/02] The relative calm continues.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[UPDATED 10/14/02] 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.
The formal approval of the new Department of Homeland Security will have very little near-term impact on the “war” on terrorism or homeland security itself. It’s a good forward step, but for now it will mostly be a lot of bureaucratic shuffling.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The wait for meaningful inspections continues. The first batch of real inspectors has arrived in Baghdad and is expected to do a first, preliminary inspection on Wednesday. The first couple of weeks will be quite tentative and unproductive as both sides familiarize themselves with the process.
Iraq continues to claim that they have no weapons of mass destruction, but that is simply their style. Back in August they claimed they would never permit inspections again, and a month later they invited inspectors back. They will dutifully file their disclosure by December 8, but will undoubtedly leave a lot of stuff off. They will wait for the U.S. to produce intelligence reports that contradict them before coming clean. That’s their style.
[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.
[UPDATED 7/23/02] 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) debt holders hired a lawyer to negotiate a better deal for Qwest’s offer to convert shorter-term debt to longer-term debt. Qwest wants debt holders to take a “haircut” on the conversion, giving up some of their principal in exchange for the company achieving a more solid balance sheet and reducing the chance of bankruptcy. Debt holders want some form of “equity kicker” (warrants or conversion rights) to compensate for the hair cut. All of this is being done without the company filing for bankruptcy. It’s actually a good sign that indicates that people think the company still has substantial unlocked value.
Click here for our more extensive commentary on The Telecom Problem.
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So far I have yet to complete my weekly dollar-cost averaging purchase. I hate buying into a rising market, but today I’ll buy before the close regardless.
There is still enough positive sentiment to keep the rally going, but sentiment alone is not enough. The issue is whether there are enough buyers lined up to purchase stock and whether the sellers have mostly completed their work.
The potential for extreme volatility is still here due to the holiday week.
Today is the last ‘full’ day of trading this week. Friday is a half day. The market is open all day on Wednesday, but people likely to leave early for the holiday and long weekend. And, the weather is expected to be miserable, so people may want to leave early to avoid a sloppy commute.
The potential for significant profit-taking is still here. Some people tried to kick-off a correction on Monday, but failed. They undoubtedly have not given up hope. Maybe they’ll try again today, maybe not.
The market will have to react to a couple of tech warnings from Monday evening. Lately, the market has been able to digest such (expected) warnings with little if any difficulty.
There are a batch of economic reports today that could be used to justify either a continuation or a conclusion of the rally: the second (“preliminary”) Q3 GDP report (expected to be revised up to anywhere from 3.6% to 4.2% from 3.1%), new homes sales, The Conference Board consumer confidence report, monthly mass layoffs, and the weekly chain store sales snapshot. There is no reason to expect any dramatic surprises here, but economists are having great difficulty with their forecasts and estimates lately. The overall picture is that the economy is somewhat sluggish, but with significant pockets of both strength and weakness. There are also a bunch of reports due on Wednesday, including some that normally would have come later in the week were it not for the holiday. The market should continue to rally as long as the reports do not damage the thesis of a Q1/Q2 recovery.
It is unclear whether the market might get excited or depressed today by the prospect of Iraq inspections commencing on Wednesday. Nothing dramatic is expected, but there is some symbolism and at least some potential for conflict.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +13 on Monday, well above the midpoint of my range of -40 to +40. 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 11/26/02] The rally is now 33 days old and at its peak. I’ll give the market nine 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 nine days, but we need to stay up there for at least another day before we can start to have real confidence in the rally again. Nasdaq has closed above 1400 for four days, but needs to stay above that level for another three days. Now that Nasdaq finally was able to break above 1420/1425, it simply needs to stay there for at least another four days. 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. Nasdaq is within striking distance of the magical 1500 level, but there is also “resistance” at 1485/1490. The 200-day moving average is also sitting around 1500 now. Nasdaq is well above its 50 and 100-day moving averages, the 50-day has turned up, the 100-day is about to turn up, and the 50-day is about to cross above the 100-day (a “golden cross”). It could be quite impressive to see the 50-day and 100-day cross at the same time that Nasdaq crosses the 200-day, as long as volume is decent and buying interest is strong. But weak volume or lack of strong buying interest could well be a fatal blow to this extended rally. There needs to be strong follow-through buying to carry Nasdaq far enough above its 200-day to inoculate it against near-term profit-taking.
[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 26, 2002 12:02:34 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology