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The really good news about Wednesday was that there was no continuation of the recent sell-off. Traders started the day in a foul mood, expecting additional selling, but no additional selling pressure materialized.
The low for the day occurred only a few minutes after the start of trading. The trend was up for the rest of the day.
The 1400 level is real resistance for Nasdaq, so we will have to see some significant buying interest to drive upwards through that level. Nasdaq did poke through 1400 and remained there for over an hour, but that way mostly just day traders blowing off a little steam. The good news is that even after failing to break through 1400 for a final time shortly after 3:30 p.m., Nasdaq was still able to mostly hang in there and close less that 4 points below the 1400 level.
Volume was quite light (1.4 billion shares). Breadth was barely positive, with 1.01 gainers for each loser. The gain does not mean a lot since volume was so light. But light volume means that there was little serious, ‘real’ selling.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Cisco (CSCO), and Oracle (ORCL), but net buyers of EMC (EMC), Nortel (NT), Lucent (LU), Rational Software (RATL), Applied Materials (AMAT), and Intel (INTC). Once again, it is heartening to see institutions buying into relative strength when they would other be selling if the market was truly on the verge of heading towards a new bear market low.
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a moderately sharp decline in applications to its level in mid-July, with a moderately sharp decline in refinancing and a moderately sharp decline in applications to purchase. This was a negative report, but applications are still at a high level. People are more focused on the holidays than on housing.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 0.85% on Wednesday to 31.40, which is in the lower half of the high anxiety zone (30 to 35). People are still quite anxious about whether the rally is going to completely unravel or will stabilize and eventually continue.
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 1.3 points. People are a little more optimistic, but still very cautious about betting too much (yet) on the rally continuing.
[UPDATED 12/12/02] The Fed funds futures market suggests that there will be no Fed rate changes through the May FOMC meeting.
Fed funds futures suggest a 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 through the January 28/29 FOMC meeting.
Fed funds futures suggest a 24% chance of a quarter-point rate cut by the March FOMC meeting. In other words, futures indicate that the Fed will not cut rates through the March 18 FOMC meeting.
Fed funds futures suggest a 10% chance of a quarter-point rate hike by the May FOMC meeting. In other words, futures indicate that the Fed will not cut rates through the May 6 FOMC meeting.
The dollar fell slightly against the yen and rose modestly 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, and is still 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 rose moderately and is modestly below the June peak. There doesn’t seem to be any real enthusiasm for aggressively pushing above the June peak.
[UPDATED 12/6/02] The last peak was the June 2 closing high of $327 and the June 3 intraday high of $331.
[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.
There was a vague report that some terrorists may have taken possession of some VX nerve gas from Iraq, but the report was too sketchy to indicate what really happened and how much was merely speculation as to what happened.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
There was no dramatic news on the Iraq front (other than the vague allegation that some terrorists may have taken possession of some VX nerve gas.) The inspectors continue to ramp up as well as pore over the Iraqi declaration.
[UPDATED 12/12/02] 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. If there is to be an all-out war with Iraq, it would happen in the winter of 2004, not this winter.
[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.
Click here for our more extensive commentary on The Telecom Problem.
I attended a seminar on health policy at the American Enterprise Institute here in Washington, D.C. Various speakers covered the usual cast of health-related issues, with particular focus on health insurance and approval of new drugs and medical devices. Newt Gingrich gave a brief summary of his new “vision” for transforming health and health care into a 21st Century system. Presumably his ideas will find their way into planning that is going on at the White House. The Commissioner of the FDA gave an address on the challenges that he sees facing the FDA. There were a few mentions of bioterrorism. There were mentions of the litigation problem, but not in any great depth other than to say that reform of the health care system requires reform of health care litigation.
I attended a presentation and discussion at the New America Foundation on the topic of General Douglas MacArther’s role in reforming the government of Japan after World War II and how that model might be applied to other nation-building efforts, such as Iraq. The key point was that Japan had already had a democratic system in place that had worked well in the 1920’s, so most of the work was simply writing a constitution and purging the government of the bad actors who had come into power on the heels of the global depression in the 1930’s. There was a lot more to it than that, but that was the core of the effort. MacArthur assigned staff to develop a proposed constitution and then handed it off to the Japanese leadership and told them to either figure out how to adapt it so they could accept it, or that he would publish it and force them to accept it. The Japanese actually did make a number of changes (approved by MacArthur of course), so it was not simply MacArthur’s constitution literally imposed on the Japanese. Trying to apply the “Japan model” to Iraq would probably not be very appropriate, other than to appoint a MacArthur-like overseer to hide herd over the nation-building process. Iraq has its own unique problems. Interesting insight came from several of the attendees who had been students in Japan at the time. They see Japan as a unique situation with little that would be applicable to Iraq.
No activity.
Traders won’t be able to resist taking a few more shots at the Nasdaq 1400 level which is less than 4 points above us. It will be easy enough to get there, but staying there is another story. We need to break far enough above 1400 so that we can stay there even if a moderate amount of selling pressure materializes. Even if we manage to close at 1405 or 1410, there will be a high risk of falling back unless some serious, ‘real’ buyers step into the market in a sustained way. On the other hand, there are probably quite a number of relatively new short sellers who thought that the market was headed for a new bear market low but weren’t expecting to have to take sharp losses at this stage, so we could see some significant short-covering over the next week if some serious selling doesn’t materialize.
The weekly unemployment insurance claims report is due out this morning and will give us some more clues about the labor market. Unfortunately, this report is very volatile. The seasonal adjustments (especially around holidays) only add to the volatility. I’m not expecting any substantial improvement, and would not be surprised to see some backsliding.
The November retail sales report is also expected this morning. The late date for Thanksgiving will result in much lower retail sales than would otherwise have been expected.
My forecast for today is that Nasdaq will close in the range -40 to +60. Nasdaq came in at +6 on Wednesday, almost exactly at the midpoint of my range of -50 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 12/12/02] The rally is now 44 days old, and 9 days off its peak, and looking quite ragged but hanging in there. It may or may not completely unravel. 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). Now that we have had a reasonable bounce on 12/9, the important thing is that there not be a new low before we see 1-2% confirmation bounce on relatively strong volume 3 to 6 days after the initial bounce (Friday thru Wednesday). That’s the signal that will tell us when the “carnage” is over. It is looking rather gloomy, but Nasdaq still has a good 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 11/30/02] I rate the probability of serious deflation in the U.S. over the coming year at 1 in 1,000 (0.1%). It’s easy to make a hypothetical case for deflation – in any economy – by simplify hypothesizing that a whole bunch of factors all turn south and policymakers do all the wrong things. Fortunately, that’s not likely to happen in the U.S. Sure, there are plenty of sectors where prices have come down either to excess capacity or suppressed demand, but capacity has a way of adjusting and suppressed (or pent-up) demand eventually has a way of reasserting itself. Policymakers are well aware of previous episodes of deflation, so there is little reason to believe that they will make “all the wrong moves” needed to force the economy into a deflationary depression. In truth, we are actually looking at a higher risk of inflation next year since prices of intermediate goods have risen at ever higher rates for each of the five past months. In short, don’t make the mistake of assuming that hypothetical, theoretical, potential disasters are the likely scenario.
[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 12/9/02] 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 -1.5% to 3.5% (midpoint of 1.0%) is possible. 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 -0.7% (low of -1.1 to 0.1). The same survey forecast real GDP growth of 2.6% in 2003 (low of 2.0 to 3.3). There was no hint or suggestion of deflation in these survey results. In fact, The Economist poll for consumer prices forecast a gain of 2.1% in 2003.
[UPDATED 12/4/02] Even Stephen Roach, the gloom-and-doom economist from Morgan Stanley, is forecasting real Q4 GDP growth of 1% (as of 12/2/02). He had been adamant that the economy would have a double-dip recession, but now admits that we have escaped two “double-dip alerts” this year. He does still expect that there will be more double-dip scares in the months and quarters ahead. He is a very smart former-Fed economist and even though I don’t share his gloominess, at least he does offer a solid lower bound for the likely performance of the economy.
[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 12, 2002 01:18:06 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology