| Read Jack's "diary" of life in Washington, DC after the terrorist attack. Click here. |
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. Despite recent events, I continue to peg Q2 (May or June) of 2002 as the timeframe for the return of relatively strong growth for the bulk of the tech sector.
Current short-term economic outlook: Recent events will cause a sharp drop in economic activity, but those effects may be short-lived as pent-up demand needs to be satisfied. The economy will be completely up in the air until mid-October. November and December may show the beginnings of recovery, but only to the extent that the "response" to terrorism does not continue to drag down the economy. To get the "pulse" of the economy, focus on employment, income, and advertising spending. The government issues unemployment numbers every Thursday. But, don't waste time with these numbers until about mid-October after the new wave of layoffs subsides.
Thursday's market action was just a lot of good old-fashioned selling. No "games" going on with daytraders. Some people are afraid to hold stocks and hardly anybody is interested in buying more stock, yet.
The Jobless Claims report showed a dramatic decline, but that's considered more of a fluke. We need to wait another four weeks and then see how the data start to trend. For now, ignore this report. A steep increase is expected, but I would also expect the rise to slow after a month or so.
The New Residential Construction report showed a decline back to November 2000 levels. It had been expected that construction would slow towards the end of the summer. This report is a slight negative for the economy. Further deterioration is expected in coming months.
The Philadelphia Fed Survey of manufacturers in early September was still declining, but at a much slower pace. The new orders component of the index is finally positive again. This was a very positive report, but was done before the events of September 11.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, leaped up another 12.19% on Thursday to 48.51, which is even further up in the panic zone. VIX jumped from 43 to 46 on the open and trended gradually up for the rest of the day, closing just slightly off its high. People are starting to panic. But we're still not seeing any sign of a true capitulation, yet.
The Nasdaq-100 After Hours Indicator had a mostly negative bias in the Thursday evening session, closing down 1.3 points. No sign of optimism, more people just throwing in the towel. But that may be a good sign, suggesting that capitulation may be near.
AMG Data Services reported Thursday evening that for the six market days ending Wednesday, September 19, $5.9 billion flowed out of equity funds. Only $639 million flowed into taxable bond funds. A record $66.4 billion flowed into money market funds, but a hefty chunk of that is probably earmarked for estimated tax payments.
Fed Funds futures retreated based on Greenspan's "soothing" testimony to suggest a certainty of just a quarter-point cut in interest rates at the October 2 FOMC meeting as well as an 88% chance of a half-point cut at the meeting (down from a 100% chance of a half-point and a 4% chance of three-quarters of a point). Futures also suggest a 66% chance of three-quarters of a point (total) cut (up from 60%) by the end of the year. The likely scenario is a half-point cut at the October FOMC meeting and then an additional quarter-point by the end of the year.
President Bush's speech may calm some nerves, but they main problem is still a lack of clarity as to when the bulk of the task will be complete. In other words, when can people get back to their normal lives without focusing so much attention on worrying about security. My view remains that the high-intensity portion of the "war" will be complete within two months. After that, the campaign will be more a matter of "policing" and lower-intensity "activities" comparable to what happens today in Iraq on a daily basis.
With Nasdaq down so much yesterday, I couldn't resist buying another small position of LEAP call options on the S&P 500 Tech Sector "Spider" (XLK). Even after four days they still don't have in-the-money strike prices available. One possibility, is that the options guys KNOW they're going to take a bath on these lower strike prices as soon as the market recovers.
In his testimony before the Senate Banking Committee on Thursday, Fed Chairman Greenspan suggested that we need to wait ten days or so to see how the economy adjusts to the current situation before deciding on further economic stimulus. Seems like a good idea to me.
The airlines are definitely going to get some kind of aid, somewhere between $8 billion and $15 billion. The basic idea is that virtually the entire economy depends on air travel or air transport, either directly or indirectly, so getting the industry back on its feet is absolutely essential.
All bets are off as to the short-term direction of the market. Mutual fund redemptions are the biggest risk, and could well continue for a while longer. But once redemptions taper off, watch out for the mother of all rallies. Unfortunately, we can't predict when that will be or how much lower the market could go first.
Jack Krupansky
Updated: September 25, 2001 08:15:53 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology