| NOTICE: I regret to inform you that I will probably no longer to be able to
provide this column on a daily basis after the end December, possibly even
sooner. I may occasionally provide commentary, but not on an regular,
daily basis. Hopefully I will be able to resume daily service at some
point. The web site and archive will remain at least through May.
Click
here if you wish to be notified by email if and when service resumes. Basically, I have been living off capital for the past four years (stock profits from "the boom"), but my capital burn rate for my living expenses has significantly exceeded my rate of return, even for the past year. The result is that I regretfully will be forced to seek a full-time "normal" job and hence I will be unlikely to be able to devote the five or more hours that go into this column every day. I had hoped that the market would bounce back more strongly so that my return would exceed my burn rate, but that didn't happen and I had burned through too much of my capital base by the time the market did start to take off in October 2002. I had also hoped that I would be able to build interest in this site via word of mouth, and that really didn't happen either. I would have to have ten times as many readers and have each of them pay the full suggested rate to make the site financially viable on its own. There is simply too much competition in the investment newsletter/web site business to expect that kind of interest. My thanks to all those loyal readers who have paid for their usage of the site. -- Jack Krupansky -- still The Unrepentent Optimist - 12/6/03 |
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The welcome decline in the jobless initial claims report and a solid report on manufacturing by the Philadelphia Fed may have been strong catalysts for the market, but mostly it was simply an overdue recovery bounce due to technical considerations. There were some positive analyst comments and quarterly reports, but the simple fact is that too many short-term market participants were betting on more weakness and had to start covering their bets, which inspired a cascade of short-covering and momentum trading towards the upside.
Luckily, traders didn’t run up stocks in the pre-market, so we were able to get a normal rally started. The rally probably wasn’t related to the news of the day, especially since the strong Philadelphia Fed manufacturing report caused hardly a stir when it came out at noon.
Most of the market gains came in the first 35 minutes and final two hours of trading, with the market meandering for the rest of the day. But the fact that the market was able to meander rather than sharply reverse is a good sign.
There was probably a modest amount of real buying that forced shorts to be covered, kicking off a cascade of momentum buying and further short covering. But, that kind of trading pattern would have petered out and reversed fairly quickly if there hadn’t been at least some real buying throughout the day to keep the profit takers at bay.
Nasdaq volume was barely moderate (1.72 billion shares). Breadth was strongly positive, with 2.11 gainers for each loser. This would have been a strong rally, except that volume was not very heavy.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Microsoft (MSFT), Intel (INTC), Oracle (ORCL), JDS Uniphase (JDSU), Cisco (CSCO), Nortel (NT), Applied Materials (AMAT), and EMC (EMC). Institutions were selling into the rally, but they frequently do that after buying recent dips, so there is no reason to expect the market to dramatically fall off a cliff any time in the near future. There was a fair amount of interest in buying Microsoft.
The Unemployment Insurance Weekly Claims report registered a moderately sharp decline in initial claims – under 400K for a 11th consecutive week – but a modest rise in continuing claims. This was a mostly positive, but somewhat mixed report, but there is a lot of volatility. Unadjusted initial claims fell very sharply to 411K and are well below the year-ago level of 486K. There is a seasonality effect here, so actual initial claims above 400K are normal. The 4-week moving average of initial claims declined modestly and is still well below 400K for a 11th consecutive week, and well below the level of a year ago. Unadjusted continuing claims declined moderately and are still well below the level of a year ago. Adjusted continuing claims are still well below the level a year ago. The 4-week moving average of continuing claims declined modestly, and is moderately below the level of a year ago. Initial claims have not yet been safely enough below 400K (moving average is 362K, which is still somewhat above 350K) 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 (2.6% or 2.6% unadjusted) is modestly better than during the same week in 1992 when the economy was recovering from the last recession (2.8% or 2.7% unadjusted). Initial claims were not consistently below 400K in 1992 until October. Initial claims are modestly lower than in the same week in 1992 (353K vs. 359K), and moderately lower than in 1992 once you strip off the dysfunctional seasonal adjustment (411K vs. 425K.) The talk about continuing claims being 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 remains lackluster, it’s not in too bad shape and not getting seriously worse.
The Philadelphia Fed Business Outlook Survey for December registered a sharp rise in the pace of general business activity to a pace that indicates a solid expansion. This was a positive report. According to the report, “Most indicators pointed to continued expansion, with noteworthy increases recorded in the indexes for new orders, shipments, and employment.” The pace of new orders rose very sharply – in fact, it doubled. The pace of shipments rose very sharply. The pace of unfilled orders rose very sharply. The pace of employment growth rose very sharply. The average employee workweek rose very sharply. The only real negative was that the six-month expectations declined moderately, but are still quite positive. The expectations for the level of general business activity declined moderately. Expectations for both new orders and shipments declined moderately. Expectations for unfilled orders actually rose modestly. Building an order backlog (also known as a ‘pipeline’) is a necessary step to getting to sustainable growth where manufacturers can afford to continue production even during brief slack periods. Expectations for employment declined moderately, but are still quite positive. Expectations for the average workweek rose sharply, indicating an intent to use significantly more overtime. Another bright spot was that expectations for capital expenditures rose moderately sharply and are quite positive.
The Conference Board Leading Index for November registered a modest rise (0.3%) and October was revised up to a moderate rise of 0.5%. This was a positive report. The report notes that “The leading index has now increased at almost a 6.0 percent annual rate from its most recent low in April, and this strength has been extremely widespread” and “The continued strong growth in the leading index (a 3.5 percent annual rate over the last 3-4 months, or 5.0 percent excluding the effect of declines in the money supply), is signaling that strong economic growth should persist in the near term.” I would presume that “near term” means the next few (say, three) months. The big, $64 billion question is the extent to which all this good news is simply a near-term effect of all the fiscal stimulus that could evaporate as the stimulus abates. The theory is that the stimulus was simply to get the ball rolling again (to “prime the pump”, so to speak) and is no longer needed once business confidence returns to “normal”. The Leading Index is calculated using ten indicators, six of which increased in October. The indicators making a positive contribution – in decreasing order – were average weekly initial claims for unemployment insurance (inverted), index of consumer expectations, vendor performance, average weekly manufacturing hours, stock prices, and interest rate spread. The four indicators dragging the leading index down – in decreasing order – were building permits, real money supply, manufacturers' new orders for nondefense capital goods, and manufacturers' new orders for consumer goods and materials.
After the close: AMG Data Services reported that for the week ended Wednesday, December 17, $1.9 billion flowed into equity mutual funds, with 59% going to domestic funds. This was a positive report, especially coming on the heels of the recent publicity over mutual fund trading abuses. Although this is not a lot of money, it keeps accumulating and provides a rising tide under the market that will continually surprise the short-sellers and technical traders and speculators. $1.1 billion flowed into taxable bond funds. $15.0 billion flowed out of money market funds. $294 million flowed out of municipal bond funds, the 22nd consecutive week of outflows. $151 million flowed into emerging market debt funds, the largest inflows on record, putting upwards pressure on foreign currencies (but not the larger currencies such as the euro and yen since they are not emerging markets) and downwards pressure on the dollar.
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 5.86% on Thursday to 16.25, which is still in the lower half of the low anxiety (moderate complacency) zone (15 to 20). It’s very unusual to see VIX rise so sharply when the market is having a strong day. What happened is that VIX declined as the market rose, which is typical, until VIX hit a low of 14.54 shortly after 1:00 p.m., and then VIX rose very steeply into the close even as the market also climbed. Something really spooked people into buying S&P 100 index options. It may not have been any real event, but may simply have been the lofty market levels which caused people to want to buy the options to effectively lock in their gains against the possibility of yet another market correction. Another possibility is that people saw old VIX options as being relatively cheaper compared to new VIX options. 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 3.72% on Thursday to 16.16. Except for a few oddball trades (probably mistakes) in the morning, new VIX hit a low of about 14.85 shortly after 1:00 p.m., but then rose sharply into the close. In addition to the fact that people may have been buying S&P 500 index put options to protect their portfolios, it’s also possible that some people may have been buying call options to speculate on the upside. Given that the Dow and S&P 500 have been outperforming the Nasdaq lately, there is a good chance that “the smart money” is betting (by buying S&P 500 index put options) that the Dow and S&P may be at or near the end of their near-term run.
The Nasdaq-100 VIX (VXN) fell by 2.35% on day to 24.53. People were relieved that Nasdaq finally bounced nicely.
The Nasdaq-100 After Hours Indicator had a negative tone for the Thursday evening session, closing down 0.26 points. The decline seemed to be mostly a little profit taking. People do not yet have a high level of confidence in the continuation of the market advance, but the slightness of the decline suggests a fair amount of optimism.
[12/19/03] The fed funds futures market suggests that the Fed will leave the fed funds target rate unchanged for the next few months, but possibly raise the fed funds target rate by a quarter-point in May, June or July, with another quarter-point hike in August or September. 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 against the yen but fell 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 sharply, and remains well above the $32 “anxiety” level. A lot of the gains this week were probably short-covering by speculators who suddenly realized that the capture of Saddam Hussein won’t instantly cause Iraqi oil production to jump up. 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. 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.
RealNetworks (RNWK) filed a private antitrust suit against Microsoft (MSFT). It’s not clear if this is due to any new, recent behavior by Microsoft or simply related to the accumulation of past actions over the years. It will take a few months for all the details and both sides of the story to trickle out. The press release says “The complaint alleges that Microsoft has pursued a broad course of predatory conduct over a period of years by abusing its monopoly power, resulting in substantial lost revenue and business for RealNetworks.” In some sense this suit may be analogous to the ongoing Sun (SUNW) suit, but simply filed with a long delay. I still expect the Sun suit to eventually be settled. I strongly suspect that this RealNetworks suit will eventually be settled as well. If in fact Microsoft is still engaging in anticompetitive behavior, the states or DOJ could simply raise the points with the district court in DC and the judge could twist Microsoft’s arm to force the elimination of the bad conduct. But that would still allow Real to pursue damages. I would view this suit as a non-issue for Microsoft, but as a negative for Real Networks. The cost of the suit will be a noticeable drag on Real’s earnings for the next several years and distract management from focusing exclusively on growing their business. Many of these suits are really acts of desperation rather than making good business sense. It would make much more sense for Real to bury the hatchet with Microsoft and find ways to work with Microsoft. That would be better for Real (and its shareholders) in both the near term and the long term.
[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.
There’s some potential for profit-taking after the nice rally on Thursday.
It’s a Friday, so traders will tend to close (or hedge) positions in advance of the weekend when anything can happen.
Today is also the “quadruple witching” expiration of options, so volatility could be out of the ordinary.
With Christmas coming up next Wednesday, a lot of market participants will be taking off early for the holidays.
That said, the continued accumulation of stock mutual fund inflows will continue to put pressure on the shorts and prevent too much profit-taking until Nasdaq runs up a bit more sharply.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +35 on Thursday, well above 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 300 days (1 year and 50 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 fairly soon, so the question is whether we hit 2,100 or 2,250 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 28 days off its 52-week intra-day high of 1,992.27 on November 7. Nasdaq is 12 days off its 52-week intra-day high of 1,996.08 on December 2. Nasdaq is 11 days off its 52-week intra-day high of 2,000.92 on December 3. We need to track all three of these intra-day highs until Nasdaq manages to close above them for at least a couple of days. Technical traders will be chattering about Nasdaq establishing a “triple top”, a rather bearish sign, so we do need to give this a relatively severe yellow flag.
The confirmed up-leg for Nasdaq that began with the intraday low of 1,253.22 on March 12 has run for 193 days. Nasdaq is 13 days off its closing peak of 1,989.82 on December 1 for the up-leg and for the overall post-October 2002 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 92 days old and 13 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 39 days old and 13 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 still significantly broken, and it won’t be fully recovered until it closes above the previous peak of 1,976.37 for at least three days and sets a new closing peak at least 1% above that old peak (1,996.13).
The Nasdaq correction off the intra-day high of 1,992.27 on November 7 is now 28 days old. It reached an intra-day low of 1,878.07 on Friday, November 21, a decline of 114 points or 5.73%. It may be over, but we do need to see a new 52-week closing high above that old intra-day high.
We have a secondary correction off the intra-day high of 2,000.92 on December 3 that is now 11 days old. It reached an intra-day low of 1,887.46 on Wednesday, December 10, a decline of 113 points or 5.67%. It may be over or close to over, but we do need to see a new 52-week closing high above that old intra-day high.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, November 21 with an intra-day low of 1,878.07 is now 19 days old and 13 days off its closing peak. The fact that Nasdaq is 45 points off the intra-day peak for this new leg indicates that this leg is still significantly broken, but not yet destroyed. Give it a couple more days before deciding for sure.
We now have confirmation of the new minor up-leg of the Nasdaq advance that started on Wednesday, December 10 with an intra-day low of 1,887.46 and a bounce of 17 points into the close. It is now 7 days old and at its closing peak of 1,956.18 on December 18. The intra-day peak for this up-leg was 1,979.78 on December 15. We ignore Days 2 and 3 of the up-leg as long as a new intra-day low is not set. Then on Days 4 through 10 we look for a gain of at least 1% on volume higher than the previous day to signal confirmation. Monday was Day 4 with a decline of 31 points plus a decline of 61 points off the intra-day high, but the intra-day low for this leg still stands. Setting a new intra-day high for the leg and then closing very sharply off that high is a clear yellow flag. Tuesday was Day 5, but the gain was too small to be confirmation. Wednesday was Day 6 with a modest decline, but the intra-day low for the leg remains intact. Thursday was Day 7 with a 35-point gain on higher volume than the previous day and therefore was good enough for confirmation of this new minor up-leg. The fact that we are still moderately off the intra-day peak for the leg remains a yellow flag.
The potential up-leg of the Nasdaq advance that started on Tuesday, December 16 with an intra-day low of 1,901.66 and a bounce of 24 points into the close is now 3 days old and at its closing peak of 1,956.18 on December 18. The intra-day peak for this up-leg was 1,957.68 on December 18. We now wait for confirmation of this potential up-leg. We ignore Days 2 and 3 of the up-leg as long as a new intra-day low is not set. Then on Days 4 through 10 we look for a gain of at least 1% on volume higher than the previous day to signal confirmation. Wednesday was Day 2 with a modest decline, but the intra-day low for the leg remains intact. Thursday was Day 3 with a nice 35-point gain, but we don’t get confirmation on Days 2 or 3 because it’s so common to see temporary dead-cat recovery bounces that tend to evaporate as quickly as they appear. Friday will be Day 4.
The fact that Nasdaq is still 45 points off its recent 52-week intra-day high is a solid yellow flag and suggests that Nasdaq still hasn’t broken out of its near-term ‘consolidation’ phase. That does not mean that a full-blown correction is necessarily likely. We are still in a short-term trading range. There may have been as much as 125 points of ‘trading froth’ at the peak, so we could see up to another 80 points of decline before a true correction might be indicated. Note that we’re still 69 points above the starting level of the most recent confirmed minor up-leg that started on December 10. The big wildcard remains mutual fund money flows – which were inflows of $1.9 billion in the most recent week, $1.8 billion in the previous week, $2.6 billion in the previous week, $2.1 billion in the previous week, and $3.5 billion in each of the two weeks before that.
[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: December 19, 2003 02:28:20 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology