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Monday was a difficult day. We started with strong enthusiasm due to strong retail sales and some good analyst comments, but a mixed economic report throws a bucket of cold water on the whole affair. In truth, there was some negative analyst commentary as well, so a meager gain was about all we should have really expected anyway.
Volume was moderately heavy (1.9 billion shares). Breadth was slightly positive, with 1.03 gainers for each loser. From a technical perspective, it’s a bad sign when the market opens strongly, sets a new rally high, and then closes only slightly higher on heavy volume. It suggests that “professional investors” were selling into the rally. Monday might have been an exception since it was specific news that triggered the selling, but the news itself may change the tone of the market anyway. There are too many “maybe’s” to draw any strong conclusions yet.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), Sun (SUNW), JDS Uniphase (JDSU), Intel (INTC), Nortel (NT), Oracle (ORCL), and Ciena (CIEN), but net buyers of EMC (EMC) and Dell (DELL). Clearly there was a fair amount of selling into the rally, but the buying of EMC and Dell was curious and suggests that there is at least a ray of hope for the weeks ahead.
The ISM Manufacturing Purchasing Managers Index (PMI) report for November registered a moderate gain, but still indicated a modest contraction and was well below expectations. Still, this was a slightly positive, but mixed report. New orders contracted, but only slightly. Production jumped sharply, well above the September and October levels. The backlog of unfilled orders contracted and at a slightly higher pace. Inventories continue to contract, but at a moderately slower pace. Employment continues to contract, and at a faster pace. New export orders contracted for the first time this year, but at a modest pace. Imports are rising again after falling in October.
The Construction Spending report for October registered a modest nominal gain, but a modest real decline when adjusted for inflation. This was a fairly neutral report. Construction is neither booming nor busting.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 3.31% on Monday to 30.05, which is barely above the bottom of the high anxiety zone (30 to 35). People seemed to feel that despite the lackluster market performance, the simple fact that the market held up and did not degenerate into waves of selling is a good sign that the rally has a good shot at continuing.
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 day evening session, closing up 5.61 points. There was a little relief that the market had held together, plus a little enthusiasm that we are getting a little positive Q4 news from tech companies.
Chartered Semiconductor (CHRT) says that Q4 revenues should be modestly better than previous guidance. Revenue is still declining, but not as much as expected. Earnings will still be about the same.
Texas Instruments (TXN) says that Q4 revenues and earnings should be modestly better than previous guidance. Revenue is still declining, but not as much as expected.
Citrix Systems (CTXS) says that Q4 revenues and earnings should be better than previous guidance.
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 6% (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 rose sharply against the yen and fell moderately 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 rose moderately, but is well below the psychological $30 level. Mostly the gain was due to cooler weather, rising expectations for the economic recovery, and a strike in Venezuela, but not concerns over the Middle East and Iraq.
[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 rose modestly.
[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.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The inspections ramp-up continues. So far, so good. There was a report of a “snag” regarding some missing equipment, but in reality it was par for the course and may get resolved without much difficulty. President Bush commented that he was unimpressed with progress to date, but that was mostly posturing to pressure the Iraqis to make a comprehensive disclosure. The most pressure, the better, since it is only the intense pressure from the administration that is allowing any progress at all.
Anxiety will grow over the upcoming Iraqi declaration due on December 8. Nobody has a clue what to expect. It’s possible that the declaration might come a couple of days early, possibly by Friday. In any case, the disclosure will be sufficient to keep the inspections process moving forward.
[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.
West Virginia will join Massachusetts in appealing the decision in the litigating states portion of the Microsoft antitrust case. This does not change the landscape in any significant manner. Note that the appeal does not affect the settlement itself since the litigating states were not part of the settlement.
[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.
Click here for our more extensive commentary on The Telecom Problem.
Stilwell Financial (SV), which runs the Janus Funds, reported yet another increase in assets under management. The funds had been hemorrhaging cash for quite some time, but have stabilized and even started moving up. Here’s the trend: March: $189 billion, April: 178, May: 176, June: 161, July: 148, August: 150, September: 139, October: 144, November: 146. Some of the gains and losses were due to asset values, but the rest of the changes were due to inflows and outflows. Clearly September was the “bottom”. The fact that November has not exceeded August suggests that either the pace of inflows in November was less than September outflows, or the money managers switched to “safer” (i.e., more conservative or lower beta) stocks and bonds. In any case, a new trend is in place and its direction is up. The sad thing is that since the funds have switched to more conservative stocks, they will not reflect gains comparable to their losses even as the market recovers comparably to its losses over the past three years.
HP (HPQ) said that sales of printers did very well over the Thanksgiving weekend.
It does seem that we could get quite a number of positive preannouncements this month. That’s a distinct improvement and a welcome change of trend.
I made my weekly dollar-cost-averaging purchase of January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $20.
More clues about retail sales will continue to trickle in. So far, so good. Dell (DELL) is expected to release some Thanksgiving weekend sales numbers today.
The main focus of the market is now on the technical issue of whether the rally has peaked and whether it may be about to reverse and head back down. So far, there does not seem to be much enthusiasm for a heavy sell-off. It does look like institutions and “professional investors” (i.e., short/medium-term traders) are doing a fair amount of profit-taking, but it may simply be a changing of the guard as the early birds “retire” and the late-bloomers wade deeper into the market as long as it holds up.
My forecast for today is that Nasdaq will close in the range -50 to +50. Nasdaq came in at +6 on Monday, modestly above the midpoint of my range of -60 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 12/3/02] The rally is now 37 days old, and only 2 days off its peak. 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). The September 21, 2001 closing level of 1423.19 looks fairly secure. Nasdaq took a shot at the 1500 level and another shot at its 200-day moving average, but lost confidence again. This isn’t fatal, but we’ll only get a couple more shots before momentum will evaporate. It’s better for Nasdaq to consolidate a bit and attack from a position of strength rather than overreach to the 1500 level and then not be able to hold its ground, again. Nasdaq is only moderately below its 200-day moving average. Nasdaq’s 50-day moving average is poised to cross up over the 100-day moving average very soon. It’s going to take some determined buying to push past all this resistance. This week is very critical. If Nasdaq can’t break out by the end of the week, the entire rally could fizzle and evaporate. But, it is still looking as if Nasdaq will have an excellent shot at breaking out for a solid year-end “Santa Claus” rally.
[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 11/27/02] A panel of professional forecasters of the National Association for Business Economics (NABE) estimates that real Q4 GDP should grow at a rate of 1.4%. Q1 GDP should grow at a 2.5% rate. Full year 2003 GDP should grow at a rate approaching 3%. The survey was taken from November 9th to 14th.
[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: December 03, 2002 12:12:18 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology