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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 after mid-October when the new wave of layoffs subsides.
Thursday's market action exhibited a classic rotation of interest. Tech stocks languished and declined as the Dow Industrial stocks got more attention. That's a sign of momentum investors going where the action is. The decline and then recovery of Nasdaq also suggested early short-selling by day traders coupled with buying to close out their positions later in the day.
The Durable Goods report was down slightly in August, about as expected. This was a slightly negative report, but it is all such ancient history now.
The Jobless Claims report, as expected, showed a significant jump in initial claims last week. The next few weeks will show the incremental effects of the new wave of layoffs. But the latter half of October should show some stabilization.
The New Homes Sales report showed some growth in August, but significantly below expectations. This is still a slightly positive report. Housing demand is expected to fall off in coming months.
The Conference Board Help Wanted Index fell to a new low in August. This is a very negative report.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 4.29% on Thursday to 37.47, which is still in the very high anxiety zone, but even further below the panic zone than on Wednesday. Even at the market low around 12:30, VIX was only up to 39.65. So, there didn't seem to be any sense of urgency to zoom back into the panic zone. There was no "spiking" behavior of any note. Just some jitters. Chalk up another good day for VIX.
The Nasdaq-100 After Hours Indicator started the Thursday evening session with a decidedly negative bias, but turned flat to slightly mixed, and then trended up sharply for the last third of the session, closing up 3.2 points. Well, we got at least a little enthusiasm, probably just relief that we had no major tech warnings.
All of the major techs are going to have to issue some kind of warning, so it's just a question of when. Usually they preannounce just before the end of the quarter, but this time they may have to sift through a lot of crazy effects to even estimate where they are. Next week could be when we hear most of the preliminary numbers.
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 (no change) of a half-point cut at the meeting. Futures now suggest a certainty of three-quarters of a point (total) cut by the end of the year as well as an 8% chance of a total of a full-point of cuts. 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.
Microsoft (MSFT) goes back to the courtroom today for a "status conference" with the new district court judge. The topic is basically a discussion or how to proceed with remaining issues, "discovery", depositions, and simply scheduling the mess. Nothing exciting, but this will offer us the first glimpse of the new judge's attitude towards the parties and the case overall. I'll be there. The business outlook for the company is of far greater interest to the market than the antitrust case. The first "real" hearing may not be until January of 2002.
Clearly, the economy was getting into trouble in August. But now we will never know whether September would have been the beginning of stabilization. Fortunately, the extreme nature of recent shocks may result in such a steep near-term decline, that some initial recovery is fairly likely within a couple of months. Whether the market focuses on the very near-term decline or the medium term recovery will vary from day to day.
We all watch the market's twisting and turning on a daily basis, but until we get a little more distance from recent events these market meanderings have little meaning. I'm still targeting the latter half of October as the timeframe when we will start getting some real "visibility". Enjoy the rollercoaster until then.
As far as the "New War" (ala "New Economy"), it's already beginning to seem a lot less than originally made out to be. Yesterday they were talking about a "go slow" approach. The market will quickly get used to the idea that not much will happen for extended periods of time and occasionally there will be a moderately big "flare up". In any case, it's all quite literally up in the air. So get used to it and move on. As far as the chance of additional attacks or a possible chem/bio attack, same advice. Eventually, there will be additional terrorist attacks. And eventually somebody is going to try a chemical or biological attack. Accept it and move on. Or move to Tahiti.
Jack Krupansky
Updated: September 27, 2001 11:07:03 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology