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I’m not so sure that the Fed deserves all the credit for the strong rally on Tuesday, but clearly anticipation of the Fed and follow-through after the FOMC announcement was a major factor. Sometimes, a good day is simply a confluence of a bunch of positive factors.
Short-covering was probably also a significant factor in the rally.
The most significant factor in the rally may simply have been the lack of any significant selling pressure, suggesting that the recent correction may in fact be over.
I suspect that there has been enough incremental money flowing into stock mutual funds to keep the bears on the run with a rising tide of money under the market. Unfortunately, the inflows are still too meager to keep the market moving up steadily.
Volume was heavy (2.05 billion shares). Breadth was strongly positive, with 2.38 gainers for each loser. This was a solid rally, with a big point gain and solid breadth and on heavy volume.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Nortel (NT), EMC (EMC), Intel (INTC), Cisco (CSCO), Microsoft (MSFT), and Brocade (BRCD), but net buyers of JDS Uniphase (JDSU) and Applied Materials (AMAT). Institutions were selling into the rally, but that’s what they typically do after buying recent dips, so there is no reason to believe that the market is likely to dramatically fall off a cliff any time soon.
The Federal Reserve FOMC statement noted that the Fed is keeping the target for the fed funds rate unchanged and noted that “spending is firming, and the labor market appears to be stabilizing” but “the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal”. This was a mixed, but relatively positive report. The economy is making good progress, but clearly is not out of the woods yet. The committee said that “policy accommodation [low interest rate and plenty of money available] can be maintained for a considerable period”, signaling the bond market that they should try to keep the 10-year treasury yield down and not anticipate a rise of either the target fed funds rate or inflation for quite a number of months.
The Durable Goods report for September registered a moderately sharp rise in new orders, a sharp rise in shipments, a slight rise in unfilled orders, and a moderate decline in inventories. This was a positive report. Orders for nondefense capital goods (with and without aircraft) rose sharply. Orders for communications equipment were up very sharply. Orders for computers and related products were down moderately, but actually up very sharply ex the seasonal adjustment. Please note that there tends to be a lot of monthly volatility for orders and shipments, primarily since few customers buy durable goods on a nice, smooth monthly cycle.
The Conference Board Consumer Confidence report for October registered a moderately sharp gain, with a moderate gain in the Expectations index and a sharp gain in the Present Situation index (to its highest level since May). This was a positive report. The report notes that “After declining for five consecutive months, the Present Situation Index reversed course in October. A more favorable job market was a major factor in the turnaround. And, the belief that this trend will continue has boosted expectations. With the holiday season around the corner, this improvement in consumers’ spirits is a good omen for upcoming retail sales.” Please note that there is no clear and indisputable link between consumer confidence reports and future consumer spending.
The BTM/UBSW Weekly Chain Store Sales Snapshot registered a sharp decline compared to the prior week. This was a negative report, but there is a lot of volatility. At least part of the slowdown was blamed on warmer weather and forest fires. Sales were up a decent 5.8% over a year ago. BTM lowered their October forecast to 2.5% to 3% growth compared to a year ago (previous forecast was 3% over a year ago.)
The weekly Reuters Instinet Redbook Sales Average report registered a sharp rise in chain store sales (1.1%) for the four weeks ended October 25 compared to the same weeks in September. This was a positive report. Sales at major retailers were up 3.3% for the week ended October 11 compared to a year ago (they were up 3.5% a week ago).
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a slight gain to -18 from -19 (out of a range from -100 to +100). This was a slightly positive report, but we are still stuck in a narrow, flat range. There was a 1% gain in the consumer view of the overall economy, but no change in how consumers feel about their own finances and no change in how consumers view the buying climate. Consumer confidence may still be in somewhat of a limbo state as everyone waits to see what happens next in the economy, the workplace, and the stock market – and wondering what’s really going on in Iraq. Please note that there is no clear and indisputable link between consumer confidence reports and future consumer spending.
NOTICE: I am still using the “old” VIX even though CBOE began offering the “new” VIX on September 22nd. The old VIX is based on options for the S&P 100 index whereas the new VIX is based on options for the more popular S&P 500 index. I’m still investigating how to switch over to the new VIX and how that relates to historical data.
The old CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 6.60% on Tuesday to 17.84, which is only modestly above the midpoint of the low anxiety (moderate complacency) zone (15 to 20). People were rather relieved by the nice market bounce. 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 new VIX fell by 6.80% on Tuesday to 16.82.
The Nasdaq-100 VIX (VXN) fell by 4.29% on Tuesday to 25.00.
The Nasdaq-100 After Hours Indicator had a negative tone for the Tuesday evening session, closing down 3.01 points. There were some quarterly reports for smaller companies that were somewhat disappointing, but I would pin much of the decline on simply profit-taking after the strong rally.
[10/24/03] 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 fell moderately against the yen but rose moderately sharply against 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 sharply, and is modestly below 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 very 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.
[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.
Sony (SNE) announced that they will be cutting 20,000 jobs worldwide over the next three years. It’s not clear how many of those jobs are in the U.S. This is another example that the restructuring process continues and will continue to be somewhat of a drag on the economy. It’s difficult to tell for sure, but it does appear that the restructuring of the tech sector is at least incrementally winding down. In truth, restructuring is a never-ending, ongoing process that keeps the economy healthy. Many of the problems that we had over the past three years were due to the fact that business was so good between 1995 and 2000 that needed restructuring was deferred and all sorts of deadwood accumulated. But quite a bit of deadwood has been dealt with over the past two years, leaving us with a much healthier tech sector.
I attended a half-day conference at the American Enterprise Institute here in Washington, D.C. on the topic of the implications of the draft proposed constitution for the European Union. In addition to local experts, several European politicians who were involved in the drafting also made presentations. It was quite a lively discussion, with a lot of criticisms and a lot of strong defense of the European approach. One interesting admission was that the constitution is still a work in progress and substantial changes are anticipated even after it is ratified. Of course a constitution is subject the amendment, but there seem to be quite a number of areas where they know now that they don’t have the right formula. The EU has ambitions of being a world power, and although they are a true economic ‘giant’, they know full well that they are also a military ‘dwarf’.
[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.
After the strong rally on Tuesday, in would be no surprise to see some profit-taking, but the strength on Tuesday could lead to some decent follow-through.
It’s possible that people may be betting on a nice rally going into the Q3 GDP report on Thursday and the October employment report next Friday.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +49 on Tuesday, only slightly below the upper end 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 265 days (1 year and 14 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 than where it was at the beginning of August. 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 is 9 days off its 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 sell-off has shown that this was a near-term market ‘top’.
We have been in a correction off of that 52-week intra-day high for 9 days.
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 157 days. Nasdaq is 8 days off its closing peak of 1,950.14 on October 16 (previous peaks were 1,943.19 on October 14, 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 56 days old and 8 days 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.
Friday, October 24 was Day 1 of a potential up-leg, with Nasdaq closing sharply (24 points) above the intra-day low of 1,841.62. Monday was Day 2, with a moderate point-gain on light volume, but it doesn’t matter what happens on days 2 and 3 as long as a new intra-day low is not set. Tuesday was Day 3 with a really solid rally on heavy volume, but even that doesn’t count as confirmation of a new up-leg since it is not uncommon to see strong dead-cat bounces on days 2 and 3 of a potential up-leg. I am half-tempted to override the Day 3 rule since the rise was on such heavy volume, but if it really is a new up-leg then we will see plenty of follow-through soon enough. Today is Day 4. 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 28, 2003 10:48:56 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology