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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 peaks.
The Fed did its thing, as expected, and cut interest rates by half a point. No big surprise. The market flailed in all directions. About as expected.
Nothing conclusive to say about yesterday's market action other than there was a little relief that the market did not fall apart (especially considering the tech warnings Monday night). That and traders playing against each other. No major buying or selling on the Nasdaq. The market gains could well have been short covering by those who had hoped for more of a sell off.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL 2.04% on Tuesday to 34.07, which is incrementally further down from the upper end of the high anxiety zone. VIX jumped up above 35 on the open and stayed up there until about 3:15 when it began a steep decline into the close as the market rallied. VIX was very volatile from the time of the FOMC announcement until the start of that decline. VIX may stay fairly high (> 30.0) for some time until the economy stabilizes.
The Nasdaq-100 After Hours Indicator spent the entire Tuesday evening session with a negative bias but managed to recover from most of the loss and close down only 0.5 points. Yeah, there were a few more warnings, but no worse than could be expected given the "dramatic" ending of the quarter.
It is worth noting that many companies may "hide" (either overtly or covertly) part of their lousy Q3/Q4 business as part of the impact of recent events. The FASB accounting geeks have decreed that all of the costs incurred as a result of the recent events must be charged off as current "expenses" and not as "non-recurring items". But companies, even supposedly respectable ones, may "cheat" and pull in some of their Q4 expenses or charges so that Q4 will look better evedn as Q3 looks truly ugly.
Another factor worth noting is that a fair amount of the Q3 business that did not "close" due to recent events will end up happening in Q4 and will help compensate for general weakness in Q4. So, Q4 could possibly turn out better than expected. But, with so many companies impacted by recent events, the overall business level in Q4 is more likely to be significantly lower than expected just a month ago.
How many tech companies don't have this same story to tell: "The terrorist attacks cost us three weeks of business at the end of a back-loaded quarter". Most tech businesses operate with most quarters being "back-loaded" since customers know that if they hold out until the last minute they can get a great deal as the company is anxious to "book" the business.
After yesterday's rate cut, Fed Funds futures suggest an 80% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting and a 46% chance of another quarter-point cut in December. The likely scenario is a quarter-point cut at the November meeting and then no additional cuts unless the economy deteriorates further than already expected.
Give the market and the economy two more weeks to get their respective acts together. Until then, ANYTHING goes.
Short term, the "pros" on Wall Street may try to get people to buy into companies that supply the "necessities" and "basic comforts" of life as people are still a little bit too stunned to go for extravagant expenditures. That may be why the Dow Industrial companies are doing so well. "Discretionary" technology is viewed as not being a high priority. Still, in this kind of crazy economy and market, anything goes. I still expect consumers to snap back much faster than the "experts" expect.
Jack Krupansky
Updated: October 03, 2001 12:05:02 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology