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Wednesday was a classic “buy the rumor, sell the news” sell-off for Nasdaq, a classic “sell into the rally” day. Despite the modest nominal point loss, Nasdaq closed 27 points off its opening level and intra-day peak. This was a definite yellow flag day that could indicate a near-term market ‘top’.
Intel had good, solid news on Tuesday evening and there was plenty of positive sentiment in the pre-market. The problem was that there was too much positive sentiment in the pre-market, with the market reaching buying exhaustion, where everybody who was going to buy (or cover short positions) had done so. By the time the market opened, there was no significant unsatisfied buying, so it was a no-brainer for traders and speculators to reverse and bet on the downside.
The good news is that there was no evidence of any significant ‘real’ selling pressure. Nasdaq reached its morning low shortly before 10:30 a.m. and closed slightly above that level. There was a deeper dip shortly before 3:00 p.m., but was followed by a modest recovery into the close.
In essence, Wednesday was a “day trader’s delight”.
Nasdaq opened 23 points higher and rose only another 49 cents before beginning its dive. The 1965 and 1950 levels offered too much resistance, but the 1935 level offered reasonable support.
There was an item on Briefing.com at 10:42 a.m. that said they were “Hearing that a tier-1 broker is a size buyer of QQQ Dec puts this morning.” In other words, one of the major brokerage firms decided to bet heavily that the Nasdaq-100 had peaked and would decline significantly by mid-December. Buying ‘put’ options is a leveraged way to sell into a rally or short the market without the need to borrow shares to short. Also, the losses on a ‘put’ option are limited to the premium paid, regardless of how far the market might go up.
One of the ‘games’ that traders like to play is to try to build up some dramatic momentum (such as we saw in the pre-market) so that the shorts will be forced to cover, inciting a further cascade of momentum buying and short covering, and then a reversal of the same process once the buying pressure has petered out.
The sell-off on Wednesday had far less to do with “valuation concerns” than with the simple fact that the market was too heavily ‘overbought’ on a short-term technical basis.
The other good news is that the selling into the rally by short-term speculators on Wednesday takes a fair amount of pressure off the market. These people will now be sitting around waiting for a dip to buy. And those who decided to go short will simply set us up for that much more of a short-covering rally when there is a dip.
Volume was heavy (2.00 billion shares). Breadth was moderately negative, with 1.42 losers for each gainer. This was a clear sell-off. Such a sharp decline off the open and the intra-day high on such heavy volume is a very clear yellow flag that suggests (but does not prove conclusively) a ‘topping’ market. Personally, I would simply write it off to the knee-jerk over-reaction to Intel and hence not the start of a trend-change. Basically, the selling simply indicated that the excessive pre-market enthusiasm was unwarranted.
According to Thomson Financial I-Watch, institutional investors were net sellers of Nortel (NT), Sun (SUNW), JDS Uniphase (JDSU), and Microsoft (MSFT), but net buyers of Intel (INTC), Oracle (ORCL), EMC (EMC), Applied Materials (AMAT), and Cisco (CSCO). It was a mixed day, with a combination of selling into the early rally and then buying the dips, the latter strongly suggesting that the market is not about to dramatically fall off a cliff any time soon.
The New York Fed Empire State Manufacturing Survey for October registered a sharp rise in the General Business Conditions index (now positive for six consecutive months) to a record level and still indicating strongly positive conditions. This was a very positive report. The NY Fed said that “conditions improved substantially for New York manufacturers.” This was a “record-breaking month.” The new orders and shipments indexes “reached unprecedentedly high levels.” Unfilled orders rose sharply, back into positive territory, to their highest level in over a year. Even employment is now expanding. Even better, employment and the average workweek were “simultaneously positive for the first time in more than a year.” The six-month expectations indicated “an even greater degree of optimism.” Expectations for capital expenditures rose to “its highest level in more than a year.”
The Retail Sales report for September registered a modest decline, but a moderate gain ex autos. This was a mixed, but somewhat positive report. July and August sales were revised higher. It may simply be that some sales were shifted up as a result of the tax rebates. Also, this is an “advance” report which is incomplete and could well be revised higher next month much as August was revised higher.
The Fed Beige Book for the period August 25th through October 6th indicated that “the pace of economic expansion has picked up.” This was a positive report. Ten of the twelve districts indicate that “activity has been expanding”, while the other two report “mixed but steady levels of economic activity”. The Fed reports that “Consumer spending generally strengthened” and that “Most districts report strengthening in manufacturing activity.” Unfortunately, labor markets “generally remain slack”, but “some signs of a pickup are reported.”
The weekly Mortgage Bankers Association (MBA) Mortgage Application Survey registered a very sharp decline in applications, with a very sharp decline in refinancing as well as a very sharp decline in applications to purchase. This was a negative report, but there does tend to be a lot of volatility and sharp gains were reported last week. Demand for buying homes is still quite strong.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 0.67% on Wednesday to 19.26, which is modestly below the top end of the low anxiety (moderate complacency) zone (15 to 20). People were relieved (somewhat) that the market sell-off was quite limited and orderly. The bears will continue to beat their drums about the market being filled with the kind of excessive complacency that frequently presages a dramatic market decline. I wouldn’t bet the farm on that outcome, but it is a yellow flag.
The Nasdaq-100 After Hours Indicator had a negative tone for the Wednesday evening session, closing down 8.25 points. IBM was a little light on revenues. Apple (AAPL) had quite decent news. The overall quarterly report news flow wasn’t bad at all, but people were in an overall “we bought the rumor, so now we sell on the news” mood. There may be more than a little apprehension that the trading during the day suggested a short-term market peak (‘top’) and that a fair amount of profit-taking may ensue.
[10/16/03] The fed funds futures market suggests that the Fed will leave rates unchanged for the rest of the year, but possibly raise rates by a quarter-point in May. Fed funds futures are at best accurate no more than six weeks out, so those longer-term moves are purely speculative, at best.
The dollar rose moderately sharply against the yen and the euro. The dollar is quite sound and no true investor should lose any sleep worrying about whether the dollar is ‘weak’ or ‘strong’ on any given day, week, month, quarter, or year.
The price of oil fell modestly, but is still moderately above the $30 “comfort” level. In any case, the price of oil continues to be relatively well-behaved and no true investor should lose any sleep worrying about it.
The price of gold fell sharply. In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[7/29/03] The relative calm continues. Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[7/29/03] 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 or rumors of incidents.
For the week ending Wednesday, October 15, the Pentagon reports that 2,032 fewer reservists are on active duty, for a total of 164,014. This was moderate decline. The Army, Air Force, and Navy showed decreases in the number of reservists on active duty, with no change for the Marines. The headcount has declined by 60,514 or 27% from the peak of 224,528 on May 1st.
[7/29/03] As messy as the mopping-up phase of the war continues to be, great progress is indeed being made and there is little need for true investors to fret over the negative news that so captivates the media. Over time, the economic impact of the war will be a large net positive, even if there is some short-term negative impact.
[6/25/03] I have suspended my dollar-cost averaging investment plan since my exposure to the market is now about where I want it to be.
It remains to be seen whether we will see a modest bout of profit-taking at this point. We could see a push by traders to try to break the back of the market’s momentum, but that could just as easily lead to ‘selling exhaustion’ followed by a bounce. But regardless of what traders attempt to do, we need to keep in mind that the continued, but sporadic, flow of money into stock mutual funds will tend to provide an upwards lift for the market, although the extent and timing of such lift is unpredictable on a daily basis.
The weekly jobless claims report due out today will give us a few more clues about the nature of the recovery. Initial claims could go either way, but I do expect to see a decline, at least once the dysfunctional seasonal adjustment is removed.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -4.09 on Wednesday, moderately below the midpoint of my range of -40 to +50.
The confirmed bull market for Nasdaq that began on October 9, 2002 (and was confirmed on June 16, 2003) has run for 256 days (1 year and 5 days). The market now has a longer-term upwards bias despite near-term volatility. The path of the market through the early fall is completely uncertain, but Nasdaq will likely be higher at the end of October. The important thing is that we continue to see inflows into equity mutual funds while the economy, revenues, and earnings continue to incrementally improve.
Nasdaq set a new 52-week intra-day high of 1,966.87 on October 15. The previous intra-day highs were 1,943.33 on October 14, and 1,940.97 on October 13. The fact that Nasdaq closed well off the new peak is a negative sign. I would estimate that there was upwards of 125 points of ‘trading froth’ in Nasdaq at that peak, suggesting that there may be up to another 100 points of trading froth left to be burned off should there be a correction.
The confirmed up-leg for Nasdaq that began with the intraday low of 1,253.22 on March 12 (and was confirmed Monday, March 17) has run for 147 days. Nasdaq is 1 day off its closing peak of 1,943.19 on October 14 (previous peaks were 1,933.53 on October 13, 1,915.31 on October 10, 1,911.90 on October 9, 1,909.55 on September 18, 1,888.62 on September 8, 1,868.98 on September 4, 1,852.90 on September 3, 1,841.48 on September 2, 1,810.58 on August 29, 1,800.18 on August 28, 1,782.13 on August 27, 1,777.55 on August 21, 1,761.11 on August 19, and 1,754.82 on July 14) for the up-leg and for the overall post-October bull market. That closing peak is also the current 52-week closing high.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, August 8 with an intra-day low of 1,640.88 is now 47 days old and 1 day off its closing peak. This is a minor leg nested within the larger leg that started on March 12 which is itself nested in the larger advance that started on October 9, 2002.
Tuesday, October 14 was Day 1 of a potential up-leg, with Nasdaq closing well above the intra-day low of 1,922.82. Wednesday was Day 2, with a modest loss, but it doesn’t matter what happens on days 2 and 3 as long as a new low is not set. Today is Day 3. On days 4 through 10 we look for a confirmation of the new up-leg with a 1% gain on higher volume than the previous day.
[8/19/03] The latest economic data continues to support the thesis that the U.S. economy is solidly into a gradual, zigzag, underappreciated, stealth recovery. What’s different lately is that there is now a slowly rising chorus of people basically saying “You know, this economy does seem to be improving and faster than we thought.” The recovery hasn’t been and won’t be as sharp as for a ‘traditional’ recovery, but will end up being far more durable and sustainable. The two key factors driving (or slowing for now) the pace of the recovery are the ongoing process of shutting down or restructuring ‘problem’ businesses and the pace of the formation of new businesses.
[9/1/03] Our Tech Stock ‘Safe’ Signal is still stuck at 0.00 (no safety) since none of the big tech companies are even hinting that they are seeing any significant improvement in demand. There does seem to be some sense of stabilization and a modest hint of improvement, but no clear and decisive indication of a dependable ramp up in revenues and earnings.
[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: October 15, 2003 07:09:48 PM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology