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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.
Okay, so Nasdaq has successfully extended its winning streak on Monday to... one day. In fact, we haven't had a down day this week, so far. Whatever. We're back to the eternal question of the past year: Will we finally see some follow-through by sidelined money? I view Monday's market action as primarily "technical" trading or bargain hunting.
The Conference Board Index of Leading Indicators fell in August, but that's "old" news now. Seven of the ten indicators that make up the leading index decreased in August: average weekly manufacturing hours, index of consumer expectations, stock prices, vendor performance, interest rate spread, average weekly initial claims for unemployment insurance, and building permits. This was a rather negative report, but the market rallied anyway.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL for the second day in a row by 14.38% on Monday to 41.33, but that's still up there in the panic zone. Maybe it was the short-sellers who were panicking yesterday. VIX gapped down on the open from over 47 to under 45 and then had a nice steady downtrend all day, although it closed up a little from its low. We're not out of the woods yet. A true capitulation would appear as a spasm with a succession of spikes and partial recoveries. Friday's spike may have been enough to con traders into buying into an "oversold" market, but that's never good enough to pull in the sidelined "investors" who are waiting for some good fundamental news rather than an appealing chart.
The Nasdaq-100 After Hours Indicator spent the first half of the Monday evening session with a negative bias, but then reversed and ended up 2.77 points. It would seem that some people are willing to be optimistic about the prospect of some follow-through.
AOL (AOL) warned about both earnings and revenues last night, but everybody knew that spending on advertising was going to be problematic. This is a short-term negative for the economy.
Fed Funds futures responded to the rally in stocks and once again suggest a certainty of only a quarter-point cut in interest rates at the October 2 FOMC meeting as well as an 80% chance of a half-point cut at the meeting. But a half-point cut by the end of the year is a certainty. Futures also suggest an 72% chance of three-quarters of a point (total) cut 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.
As usual, on Monday I completed another dollar-cost averaging (DCA) purchase of S&P 500 Tech Sector "Spider" (XLK) LEAP (January 2003) call options (close to the money strike price). Still no sign of in-the-money options yet.
I was at the cashier's counter at a brokerage depositing a check so I could buy some stock, when two guys came in, each to discuss dealing with margin calls. The woman at the counter mentioned that the firm has done a fair amount of "selling out" (to cover client margin calls) last week and that "tomorrow" (Tuesday) was going to be "another big margin call day". This is just one small anecdote, but illustrates a lot of the crazy stuff going on that can move the market besides simple reactions to news and economic data.
I did buy a little eBay (EBAY) and Sun Microsystems (SUNW) on Monday for two long-term, buy-and-hold accounts. Not much, but a small "flyer".
It would not surprise me if we saw a nice rally here, or even an April-style rally (that one lasted only several weeks). Not based on near-term expectations, but based on the outlook six months from now after we get through "all this stuff". The key to any sustainable rally is not whether stocks are "oversold" or "undervalued", but whether and when retail mutual fund investors decide to divert more of their investment dollars from cash and bond bunds to stocks. They'll start doing that when they begin to sense that stocks are "safer" again. Hedge funds, institutional investors, and brokerage firm in-house trading desks will tend to be far more aggressive and it's only a question of whether they're "going long" or shorting and that can vary on a daily basis.
As usual, continue to be prepared for ANYTHING and EVERYTHING to happen.
Jack Krupansky
Updated: September 25, 2001 08:15:55 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology