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Although the standard explanation is that the minor sell-off on Thursday was simply “buy the rumor and sell on the news” selling, that doesn’t really describe what happened. In fact, traders in the pre-market bought stocks when the GDP report and jobless claims report came out at 8:30 a.m. The Nasdaq-100 Pre-Market Indicator (PMI) was up over 18 points just before the open. Nasdaq opened up 19 points, fluttered a little, hit an intra-day high of up 21 points about 15 minutes into trading, and then headed south. Basically, traders managed to push Nasdaq up far enough in the pre-market and caused enough shorts to cover that there was very little unmet buying potential once the market opened. Nasdaq quickly reached the point of buying exhaustion, signaling traders to reverse and bet on the downside and encouraging shorts to reopen short positions, and also causing institutions to dump some stock into the rally. Nasdaq fell 27 points by 10:30 a.m., completely breaking the back of the GDP rally and signaling to buyers that they should simply wait until the dust settles before moving deeper into the market. Nasdaq was able to rally modestly off that morning low, but this was mere day trading which was stymied by resistance at the 1950 level and completely evaporated in the final hour of trading.
The fact that Nasdaq closed well below both its opening level and its intra-day high is a double yellow flag. That’s not to say that Nasdaq is doomed to fall, but simply that we need to see some strong buying real soon.
Volume was heavy (2.15 billion shares). Breadth was modestly negative, with 1.16 losers for each gainer. Although volume was strong, the limited point decline and near-neutral breadth suggest that this was not a very robust sell-off.
According to Thomson Financial I-Watch, institutional investors were net sellers of Intel (INTC), Sun (SUNW), JDS Uniphase (JDSU), Microsoft (MSFT), Nortel (NT), Oracle (ORCL), EMC (EMC), Lucent (LU), Applied Materials (AMAT). Institutions sold into the early rally, but they tend to do that after buying recent dips, so this does not suggest that the market is likely to dramatically fall off a cliff any time in the near future.
The Unemployment Insurance Weekly Claims report registered a modest decline in initial claims – under 400K for a fourth consecutive week – but a moderate rise in continuing claims. This was a mixed, but reasonably positive report. Unadjusted initial claims rose moderately to 348K, but moderately below the year-ago level of 376K – and well under 400K. The 4-week moving average of initial claims declined modestly and is moderately below 400,000 for a fourth consecutive week, and moderately below the level of a year ago. Unadjusted continuing claims rose moderately but are still modestly below the level of a year ago. Adjusted continuing claims are still modestly below the level a year ago. The 4-week moving average of continuing claims declined modestly, and is still modestly below the level of a year ago. Initial claims have not been safely enough below 400K to challenge the implication that payroll employment may not be growing very much at all (even though overall, household employment probably continues to grow). Unemployment won’t fall significantly until the economy begins to consistently grow at a faster pace and the pace of business restructuring slows down and the pace of business formation picks up. The insured unemployment rate (2.8% or 2.4% unadjusted) is slightly better than during the same week in 1992 when the economy was recovering from the last recession (2.9% or 2.5% unadjusted). Initial claims were not consistently below 400K in 1992 until October. Initial claims are only moderately higher than in the same week in 1992 (386K vs. 367K), and only moderately higher than in 1992 once you strip off the dysfunctional seasonal adjustment (348K vs. 333K.) The talk about continuing claims being at or near a 20-year high is a complete red herring (true, but irrelevant) since it is the insured unemployment rate (see three sentences back) that is important and covered employment has risen by over 21% since 1992 alone. The bottom line is that although the labor market is lackluster, it’s not in too bad shape and not getting seriously worse.
The advance estimate Gross Domestic Product (GDP) report for Q3 registered a sharply higher than expected gain in real GDP growth (7.2%). This was a very positive report, but it’s ancient history and gives us little guidance about the economy in the coming months (or even in the past three months). I wouldn’t get too excited about the 7%+ growth rate since a lot of it was due to the one-time effects of short-term fiscal stimulus. I wouldn’t get too excited about Q4 either. What really will matter will be the pace of growth throughout 2004.
The Chicago Fed National Activity Index for September registered a moderately sharp gain, back into modestly positive territory, indicating that the economy is growing somewhat “above trend”. This was a positive report. The 3-month moving average is also above zero, for the first time since June 2000. 46 of the 85 individual indicators comprising the index displayed above-average growth in September. 57 improved, although 21 of these still indicated below-average growth.
The Conference Board Help Wanted Index for September registered no change in help-wanted advertising. This was a neutral report, suggesting some stabilization of the labor market. The index is still moderately below the level of a year ago. The Conference Board refers to their Help-Wanted Advertising Index as a “key barometer of America’s job market”. They opine that “An advancing economy and a sustained increase in the demand for goods and services will generate more demand for labor. If the economy stays on its current growth path, a better job market should start to develop over the next six months.” Unfortunately, a lower percentage of labor markets have a rising want-ad volume (41%) than in August (49%), but still higher than in July (35%). I would note that in today’s job market and with the internet, companies simply don’t have to do as much newspaper advertising.
After the close: AMG Data Services reported that for the week ended Wednesday, October 29, $2.2 billion flowed into equity mutual funds, with 60% going to domestic growth and value funds. This was a positive report, enough to keep the tide rising gradually under the market, but not enough to give the market a consistently strong upwards trend. Aggressive growth funds reported the largest equity sector inflows of $499 million. $316 million flowed out of taxable bond funds. Government bond funds investing in mortgage-backed securities reported outflows of $523 million, the fifteenth consecutive week of outflows from that sector. $14.8 billion flowed out of money market funds. $32 million flowed out of municipal bond funds, the fifteenth consecutive week of outflows.
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, rose by 2.04% on Thursday to 17.50, which is the midpoint of the low anxiety (moderate complacency) zone (15 to 20). People were disappointed that GDP rally sold-off so easily. 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 0.61% on Thursday to 16.33.
The Nasdaq-100 VIX (VXN) rose by 0.08% on Thursday to 24.74. There was a bizarre but momentary spike up to 72.70 shortly after 10:00 a.m. It was probably some sort of ‘trading error’.
The Nasdaq-100 After Hours Indicator had a positive tone for the Thursday evening session, closing up 2.38 points. There didn’t appear to be any particularly positive news to account for the gain. People probably realize that the intra-day sell-off on Thursday was a bit overdone.
[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 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 sharply, and is now well 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 moderately 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.
I’m back in New York City for a few days.
[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.
People may respond to some interesting economic reports that will be coming out today, including the Chicago PMI, the NAPM NY, Personal Income and Spending, and the Michigan consumer sentiment survey.
We’re at the last trading day of October, so there could be some atypical volatility. Sometimes there is atypical trading of mutual funds near the end of October.
Traders and short-term speculators will tend to close out positions (or at least hedge them) in advance of the weekend when anything can happen.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -4 on Thursday, 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 266 days (1 year and 16 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 11 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 11 days. The correction is probably over, but we need to see confirmation of a new up-leg first.
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 159 days. Nasdaq is 10 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 58 days old and 10 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. Wednesday was Day 4, but the gain was too meager to constitute confirmation. Thursday was Day 7, but Nasdaq declined modestly. Today is Day 6. 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.
The advance GDP report of 7.2% growth was impressive, but there is no evidence to suggest that Q4 will be more than moderately strong and there will be concerns about the pace of growth once the short-term affects of the fiscal stimulus peter out.
The monthly employment report due out next Friday is far more important than the GDP report since it tells us a lot about how the labor market is shaping up going forward rather than where the economy was one, two, and three months ago.
[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 31, 2003 12:17:37 AM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology