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I read some reports that lay the blame for Monday’s Nasdaq decline on “concerns” and “doubts” about the tech sector and “valuation concerns”. What a load of rubbish. The decline was simply profit-taking after the recent run-up, a loss of near-term momentum due a near-term petering-out of demand. That’s a short-term phenomenon that happens all the time when supply briefly outstrips demand for stocks. If it really were due to severe doubts, the sell-off would have been on high volume, and it wasn’t. The real bottom line is that whenever you suddenly see references to terms like “concerns” and “doubts” after a run-up, it is merely that the Wall Street volatility crowd (traders and short-term speculators) are trying to incite a bout of profit-taking after a run-up. In any case, rest assured that a near-term lack of momentum is not the same as an imminent correction.
That said, the issue of mutual fund money flows remains an unsettled question mark hanging over the market as a result of all the publicity over mutual fund trading abuses. We’ll just have to see how fund flows play out over the next couple of weeks. The problem is that it’s not easy to tell in real-time whether a rise or fall in the market is due to short-term traders or mutual fund money flows.
The economic reports were fairly decent, highlighting growth ahead, but this information was ignored by the market.
Nasdaq was actually fairly well-behaved for most of the day. It opened fairly flat and went nowhere until shortly after 10:00 a.m. when it suddenly fell off a cliff, falling 13 points in half an hour. Nasdaq then stayed in a narrow trading range from 10:40 a.m. until about 3:25 p.m. when it fell off a cliff again. So, most of the selling was confined to two narrow time periods, barely more than a single hour. Nasdaq seemed to find good support at the 1940 level and bounced a couple of points into the close.
Volume was light (1.74 billion shares). Breadth was strongly negative, with 2.09 losers for each loser. This was a wimpy sell-off due to the lackluster volume. Still, this is sometimes what you see when traders and short-term speculators begin a wave of profit-taking. The steep point decline and lousy breadth mean that we do need to treat this as another yellow flag.
According to Thomson Financial I-Watch, institutional investors were net sellers of EMC (EMC), Intel (INTC), and Cisco (CSCO), but net buyers of Sun (SUNW), Nortel (NT), Oracle (ORCL), Microsoft (MSFT), JDS Uniphase (JDSU), and HP (HPQ). Institutions were heavily buying the dip, strongly suggesting that the market is not about to dramatically fall off a cliff any time in the near future. That’s not to say that we couldn’t see some additional profit-taking, but institutions would be a lot less sanguine if a major correction was in the offing.
The Kansas City Fed Manufacturing Survey for October registered a modest decline in the rate of production growth, but is still indicating moderate growth in the manufacturing sector in the tenth Fed district. This was a positive report. The report optimistically notes that manufacturing activity “continued to expand strongly in October, with the year-over-year production index reaching its highest level in over five years. Manufacturers also were optimistic about future activity, with expectations for future production at their highest level in the nine-year history of the survey.” There was modest to moderate deterioration in the rates of growth for most components of the report, but overall growth is still strong. The good news is that employment has expanded for a fourth consecutive month, albeit at a more modest pace. The other good news is that the six-month production outlook rose sharply, to its highest level in over a year. Expectations for capital spending ticked up and are still pointing to improvement. The only real negative is that prices for raw materials rose at a slightly faster pace while prices for finished products fell at a faster pace, which means downwards pressure on profits.
The Richmond Fed Manufacturing Survey for October registered a sharp rise and is now indicating reasonable growth in the manufacturing sector in the Richmond Fed district. This was a very positive report. It notes that “expansion in manufacturing activity was across the board. Most firms reported stronger demand, including a few that noted an uptick resulting from Hurricane Isabel. Some weak spots remained in manufacturing, however, notably in the furniture and textile industries.” Shipments surged after contracting in September. New orders expanded moderately after contracting in recent months. The backlog of unfilled orders contracted again, but only slightly. Employment continued to contract, but at a more moderate pace. The six-month shipment outlook was unchanged and is still reasonably positive. The six-month orders outlook declined slightly but is still reasonably positive. The six-month backlog outlook declined sharply but is still reasonably positive. Six-month expectations for capital expenditures declined slightly, but are still modestly positive. Six-month expectations for wages rose moderately sharply. Unfortunately, the six-month employment outlook continues to forecast contraction, and at a moderately faster pace. This report covers the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia.
The Wal-Mart (WMT) Weekly Retail Sales Update indicated that sales are on track to meet its November forecast of 3-5% growth. This was a positive report.
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 2.22% on Monday to 17.95, which is modestly above the midpoint of the low anxiety (moderate complacency) zone (15 to 20). VIX spiked as high as 18.40 in the morning, but fell off as the day progressed, even though the market continued to decline. Basically, people took the decline in stride as one of those occasional days of profit-taking that simply happen. 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 rose by 4.08% on Monday to 17.62.
The Nasdaq-100 VIX (VXN) rose by 5.12% on Monday to 26.49.
The Nasdaq-100 After Hours Indicator had a mixed tone for the Monday evening session, closing down 0.11 points. People were willing to believe that the day’s decline was a one-time thing, but they’re not quite ready to bet on an immediate rebound.
[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 sharply against the yen but rose moderately 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 rose modestly, and is moderately above the $30 “comfort” level. People had expected oil to rise more sharply after the bombing in Saudi Arabia, but it just didn’t happen. Actually, oil did move up, but most of the gain was stripped away by anxious profit-takers. Besides, the bombing in no way related to oil production or shipment anyway. 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 rose 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 attended the press briefing for the semi-annual meeting of the Shadow Open Market Committee (SOMC) here in Washington, D.C. This is a private group of mostly academic economists, some of whom formerly worked at the Fed. They don’t follow the exact same format as the Fed FOMC, but the general concept is the same. The various members (six this time, but there is one other) meet twice a year and discuss position papers that they write related to monetary policy and the economy. They did that at their working session on Sunday afternoon, which I also attended. The topics for this meeting included the overall economic outlook, the budget deficit, the current account (trade) deficit, the housing government-sponsored enterprises (GSEs, Fannie mae and Freddie Mac) with their implicit government guarantee, property rights in Iraq, and monetary policy, including the concept of rules-based versus discretionary monetary policy. The committee doesn’t focus on interest rates, but on the size of the monetary ‘base’. After their discussions on Sunday, they drafted an overall summary which they presented at the press briefing on Monday, along with brief summaries of the papers. Then, the fun part begins when the press asks their questions. Of course the press wanted to know what the committee expected the Fed to do with interest rates, but the committee demurred, other than to tell people to look to the fed funds futures for market expectations for future interest rates. What the committee did say is that the overall rate of growth of the monetary base is about right, although there has been a somewhat disturbing slowdown of monetary growth in the past few months that needs to be reversed. The committee is not worried about any threat of deflation or current budget deficits. Nor is the committee concerned about the current account deficit since foreigners clearly have a desire to export to the U.S. and to hold U.S. assets. The committee did lambaste the Fed for not having a clear objective and worrying excessively about deflation. They want the Fed to target an inflation level of approximately 1%. Their real goal is 0% inflation, but there is approximately a 1% measurement error in the common measure of inflation (CPI). They believe that the Fed obsession with the labor markets is also misplaced and that stable, low inflation is ultimately the right remedy to stabilize the economy.
I attended a panel discussion on Offshoring at the New America Foundation. It was packed. The exporting of jobs, especially the kind of highly-skilled jobs that were so highly beneficial to the economy in the 1990’s, is a topic of great interest. Sure, a lot of people recognize that we need to allow companies to hire people where they think those employees will deliver the best value to the company, but there is a significant, and growing, amount of protectionist sentiment brewing, especially in Congress. It’s not clear to me if this is simply a transient phenomenon that will run its course fairly quickly or whether the impact will continue to snowball for years to come. The essential issue is whether innovations will come along that result in the creation of a significant number of high-power jobs to outweigh the jobs lost to offshoring.
[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.
Today is Veteran’s Day, a legal holiday, so the bond market, banks, and government offices are closed. The stock market is still open, but stock trading tends to be a bit sluggish when the bond market is closed.
We may or may not see a decent bounce after the decline on Monday. Traders and short-term speculators may continue to engage in profit-taking, but the selling could peter out and turn into a rally. Or, maybe we need another day or two of good, solid profit-taking to really turn sentiment around, again.
The big wildcard remains mutual fund money flows in light of the recently reported mutual fund trading abuses. It’s difficult to anticipate whether people have finished their selling of funds or not. Also, it’s the net money flows that matter, so people may continue to dump ‘bad’ funds even as money continues to flow into ‘good’ funds (e.g., passive index funds.)
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -29 on Monday, only moderately above the lower 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 273 days (1 year and 23 days). The market now has a longer-term upwards bias despite near-term volatility. The path of the market through the end of the year is of course uncertain, but Nasdaq will most likely be moderately higher at the end of December than where it was at the beginning of November. Nasdaq should break above the 2,000 level within the next few weeks, so the question is whether we hit 2,100, 2,250, or even 2,500 by the end of the year. 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 1 day off its 52-week intra-day high of 1,992.27 on November 7. The previous intra-day highs were 1,977.91 on November 6, 1,971.38 on November 4, 1,969.26 on November 3, 1,966.87 on October 15, 1,943.33 on October 14, and 1,940.97 on October 13.
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 166 days. Nasdaq is 2 days off its closing peak of 1,976.37 on November 6 (previous peaks were 1,967.70 on November 3, 1,950.14 on October 16, 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 65 days old and 2 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.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, October 24 with an intra-day low of 1,841.62 is now 12 days old and 2 days off its closing peak. This is a minor leg nested within the larger leg that started on August 8 which is itself nested in the larger advance that started on March 12. Multiple nested up-legs are a sign of deep strength in the market. This leg is on the verge of being ‘broken’ due to the 50-point decline off of the recent intra-day high.
The fact that Nasdaq is 50 points off its recent intra-day high is a clear yellow flag and suggests that the recent run-up may now be in a near-term ‘consolidation’ mode. That does not mean that a full-blown correction is necessarily likely. There may have been as much as 125 points of ‘trading froth’ at the peak, so we could see up to another 75 points of decline before a true correction might be indicated. Note that we’re still 100 points above the starting level of the most recent minor up-leg that started on October 24. The big wildcard remains mutual fund money flows.
[11/5/03] The latest economic data continues to support the thesis that the U.S. economy is solidly into a gradual, zigzag, underappreciated, stealth recovery. The Q3 GDP report certainly convinced a lot of people that the economy is stronger than previously thought, but the cynics continue to promote the idea that the recent strength was almost solely due to short-term fiscal stimulus. I disagree. I believe that the economy would have been reasonably strong without the stimulus (ala Q2) and that we will see incremental improvement (compared to Q2) over the next four quarters. Some people will be shocked or raise alarm when Q4 comes in ‘weaker’ than the ‘artificially sweetened’ Q3, but there is no reason for alarm. That’s part of the zigzag process. The two key factors driving the pace of the recovery will continue to be the ongoing process of shutting down or restructuring ‘problem’ businesses and the pace of the formation of new businesses which will create new jobs.
[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: November 10, 2003 11:56:48 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology