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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.
Wednesday's market action appeared to be just a clean sell-off. Possibly this was due to more mutual fund redemptions or buyers from Monday throwing in the towel when it became clear that there was no follow-through. I suspect the latter. It's also possible that non-daytrading short-sellers who got blown away on Monday decided that the lack of significant buying interest Wednesday morning left the market as a tempting target for short-selling.
The Oil and Gas Inventories report for last week showed a rise in inventory, which is good news and will keep energy prices and inflation at an even more subdued level. This will also help to lower the expenses of businesses and improve capital spending and profits.
The Mortgage Bankers Association’s index of mortgage applications for last week showed some improvement, but mostly in re-financing. Still, there was a slight uptick in applications for purchase. Economists had been expecting housing demand to fall off after the summer, so anything better than an outright decline in mortgage applications is a positive sign.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose a slight 1% on Wednesday to 39.26, which is just below the panic zone. VIX actually opened lower and stayed lower until about 11:15 a.m. when the pace of selling became too much of a drag for confidence to hold up. Still, the rise in anxiety was very modest. People aren't quite ready to give up hope on a rally, but they aren't very committed to that proposition either.
Last Thursday was not a "true" capitulation or "exhaustion of selling", despite the "spike" of VIX into the upper 50's. A "true", market reversing VIX spike will be more of a spasm of successively higher spikes. We may soon be setting up for that "grand finale" of the 2000/2001 bear market, the point where almost everybody who could possibly sell has done so. Then we can begin a new bull market. But to do so, shortly after the market bottom we will also need to see some kind of news that inspires "hope". Without that "hope" the market bottom becomes just a "ledge" on the way down to further depths.
The Nasdaq-100 After Hours Indicator started the Wednesday evening session with a strong positive bias and then quickly reversed, closing down 2.84 points. No evidence of any solid optimism.
Exodus Communications (EXDS) finally went Chapter 11. Somebody is going to pick up their assets at pennies on the dollar and be able to make some real money. By Spring of 2002 we should finally be at the stage where all the dying and "walking dead" dot-coms are finally gone and only the true survivors remain.
The New York Stock Exchange Member Firms report on Customers' Margin Debt for August showed a decline of 2.5% from July (from $165.25 billion to $161.13 billion). Margin debt is now at its lowest level since March of 1999 ($156.44 billion). Cash in margin accounts rose 6.2% (from $97.95 billion to $103.99 billion), the highest since March of this year ($106.3 billion). The September report can be expected to show a further decline in margin debt.
Fed Funds futures continue to suggest a certainty of a quarter-point cut in interest rates at the October 2 FOMC meeting as well as an 88% chance (up from 84%) 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 a 96% chance (unchanged) 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.
The next two weeks will be rather anxiety-provoking, but by mid-October we should start seeing the shock of recent events start to fade and some sense of normalcy to return.
Greenspan, et al, want to wait another week or two before deciding how much extra "stimulus" the economy needs.
Last night I expected to see far less business at the restaurant where I had dinner here in Washington. They were much busier than I expected and compared to a week ago. Maybe American consumers are significantly more resilient and sensible than the media (and politicians and "analysts") give them credit for.
Short-term traders (including hedge funds, institutions, and brokerage firm trading desks) will "play" with the market for a while until long-term investors feel that the outlook for the economy is certain enough to risk staking out positions. There is certainly a lot of potential downside risk, but there is also plenty of room for upside surprises once everyone "adjusts" to recent events. As usual, be prepared for ANYTHING.
I'll probably be picking up one or two additional, small stock positions over the coming week (in addition to my weekly dollar-cost averaging program.) It's certainly not a "safe" time to be buying, but I'd rather get positioned and done with it rather than waste effort trying to "time" the market. My feeling is that we're close enough to the bottom.
Jack Krupansky
Updated: September 26, 2001 11:39:40 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology