My tech stock "safe" signal is still stuck at 0.0 since none of the major tech companies is yet publicly claiming that they have evidence (other than "hope" or "hints") that their business has started to accelerate out of the tech downturn. My "safe" signal requires at least 20% or 1 out of 5 of the top 25 tech companies to signal acceleration. Expect at least two quarters to elapse from the time of the first indications of an upturn and the return of solid growth. The theory is that the stock market should begin a sustainable rally six months in advance of the return of strong growth. I continue to peg Q2 (May or June) of 2002 as the timeframe for the return of strong growth for the bulk of the tech sector. There may be lots of little rallies over the next few months, but just as many bouts of "profit taking".
Current short-term economic outlook: "Life in the trough". Don't count on much if any sign of a strong recovery in the next few months (through November). MAYBE a bit of slowing of the decline or even a little "stabilization". With at best a few "hints" of improvement. The economy is at an "inflection point" where its true trend won't be discernable for a few months. The gradually strengthening positive forces will only slowly overtake the gradually weakening negative "drags" (e.g., layoffs and cost cutting) that are still very strong.
We can't take a lot of comfort in the slight "bounce" in Nasdaq on Monday. But at least we did not see major selling by mutual funds. No need to get optimistic, yet.
I usually don't comment on "market breadth", but on Monday both Nasdaq and the NYSE showed very negative breadth with far more losers than gainers even though Nasdaq was up and the Dow was almost flat. This suggests an interest in large-cap stocks and selling of small/mid-cap stocks. In fact, I was talking with a broker at Morgan Stanley and he said that on their Monday morning call, Barton Biggs was was saying that he expected a big gain in 5 to 7 weeks and that the large-cap stocks would lead. Maybe some people are picking up on that "strategy". But note that he also said that there would likely be a further drop first as consumer confidence falters. Briefing.com also seems to highlight a lot of large-cap techs lately. This might mark a "shift" (profit-taking) from the smaller "value" stocks that have been so popular for the part year. We'll see.
There was talk about a rumored settlement proposal from Microsoft (MSFT) in their antitrust case. Although that is possible, more likely it's just the proposal of the basis for the conduct of the trial which both sides are supposed to agree on and submit on Friday. Sure, some of the terms may seem like "settlement", but don't get too excited yet. In other words, what's going on now is probably not settlement talk, but the discussion for the joint September 14th filing. And the buying of Microsoft stock may just have been short-covering. And if you subtracted this "Microsoft effect" from yesterday's market action, things could have been much uglier. Other than all this, I still feel positive about Microsoft for the long term.
The Consumer Credit report showed that total consumer credit outstanding was unchanged in July from June. I consider this a moderately positive report because it indicates that consumers are behaving rationally. Some would consider it a negative in the sense that consumer debt has been fueling a big part the consumer spending that has been holding up the economy.
The Kansas City Fed Manufacturing Survey for August showed significant improvement. It's only one month (for one Fed district) and that's not enough to declare a trend, but this was a very positive report.
Qwest Communications (Q) announced a job cut, but the market actually reacted enthusiastically. That's a typical sign of an oversold market. Everybody who would've shorted the stock already had and the bulls sensed that and "squeezed" them a little.
Continuing the new "mini-trend" in debt paydown, Level 3 Communications (LVLT) made an offer to buy back $1.8 billion of its $8 billion in debt at 27 to 54 cents on the dollar. I am glad to see this kind of trend develop. Given the importance of cash to basic survival these days, it indicates that the management of such companies are feeling more optimistic about the future. And that is very important. As consumer confidence falters a little, business confidence needs to pick up the slack. The theory is that a pick-up in business investment will compensate for a slight slowing of consumer spending.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell a modest 1.19% on Monday to 33.95 which is still in the upper end of the high anxiety zone. Actually, VIX spiked on the open way up to 37.35, which is well up in the very high anxiety zone. But it quickly fell back to the 36 range and by 11:00 a.m. was back under 35. It stayed between 34 and 35.5 for the rest of the day before dropping slightly near the close. There was no sign of any "true" capitulation, despite the opening spike, but traders may have considered the spike "good enough" for their short-term purposes.
The Nasdaq-100 After Hours Indicator showed a mostly positive bias in the Monday evening trading session, close up 1 point. Not what I'd call great optimism, but neither was it pessimism and probably it was mostly relief that there was little in the way of big tech warnings.
Xilinx (XLNX) reaffirmed its quarterly guidance. Not exactly a sign of recovery, but at least a hint of "bottoming".
Vitesse Semicondustor (VTSS) warned of a bigger drop in quarterly revenues than expected.
Newport (NEWP) warned of a revenue shortfall. The telecom companies are desperately trying to rationalize themselves (sometimes out of existence) and that puts a lot of pressure on their suppliers.
Amazon (AMZN) has inked yet another agreement to handle the web operations for a traditional retailer, this time it's Target (TGT). I expect this trend to continue. Think of it as simply "outsourcing" of web retail operations. It will save Target a lot of money and give Amazon incremental income and allow them to leverage their web infrastructure. But there is still the open question of what price the stock should be bought at. It's back in the $8 range, but I'd rather pay in the $4 range. They have close to $2 billion in debt that is an albatross around their neck.
Fed Funds futures still suggest a certainty of a quarter-point cut in interest rates at the October 2 FOMC meeting as well as a 20% (up from 10%) chance of a half-point cut at the October meeting. Futures are also suggesting a 72% (up from 68%) chance of a second quarter-point cut by the end of the year. The likely scenario is a quarter-point cut at both the October and November FOMC meetings.
Fed Officals continued their public comment "campaign" on Monday. Kansas City Fed President Thomas Hoenig said the U.S. economy will improve the rest of 2001 and into next year, but that there are risks. Fed Bank of Philadelphia President Anthony Santomero said that incremental cuts would contribute more to economic stability than aggressive cuts (good point). Fed Bank of St. Louis President William Poole said the U.S. economy has an "excellent" chance of avoiding a fall in real GDP despite rising unemployment.
I completed my latest dollar-cost averaging (DCA) purchase on Monday. I noticed a dramatic increase in volume of the LEAP options (January 2003 S&P 500 Tech Sector "Spider" (XLK) calls with a $22 strike price -- no $20 available yet) that I've been buying recently. Frequently, I'm the only person buying, but not Monday.
I forgot to mention that I "cheated" again (but just a little bit) on Friday and bought some more of the options. I put in a limit order for two contracts and only one filled by the end of the day and that was the entire volume for the day on that particular option. So what changed on Monday? Apparently, SOMEBODY, or a bunch of somebodies, have decided that it's worth taking a "flyer" on the market. Maybe due to the VIX "spike". We'll see how things work out.
Sure, the market may "bounce". But we're not going to have a sustainable rally until the outflows for mutual funds cease and we get a combination of mutual fund inflows plus hedge funds taking a "positive, constructive" view of the market.
It was very curious how we had such a great opportunity to "test" the April Nasdaq low, but we didn't. Why not? Probably because there wasn't any significant selling by mutual funds to "inspire" a further plunge. Or maybe there are just too many optimists who (as in April) are all too willing to "jump the gun". Maybe another day, after "the bounce" peters out. Or, maybe not and Monday was "the test" and it really did fail. Ultimately, it is the economy that holds the key. If business managers start to see enough hints that the big decline is truly starting to slow, then the market will quickly pick up on those same cues. But there will be enough ongoing bad news in this mixed economy to keep everybody on their toes. Be prepared for ANYTHING to happen.
Jack Krupansky
Updated: September 11, 2001 08:04:45 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology