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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.
Don't get too excited by that little rally we had yesterday. The market got caught flat-footed (actually, they call it "leaning the wrong way") when some of the economic data was better than expected, the guys in Washington agreed on a rough plan for fiscal stimulus, and Cisco (CSCO) said it was comfortable with consensus estimates. That plus a ton of short covering caused a nice rally. There might have been some real buying in there, but it's hard to tell. Now we come back to that eternal moment of truth: Will there be follow-through, especially by mutual fund managers?
Note that the Cisco (CSCO) quarter runs through October, so their back-end-loaded business is yet to come rather than blown away in September.
The Vehicle Sales report for September showed the slowest sales in three years. But given that the economy was slowing anyway, that's not a bad showing considering recent events. I would rate this a neutral report.
The Chicago Fed National Activity Index fell in August despite improvement in July. The level of the index strongly suggests a recession. Yes, we probably are in a recession right now. This was a rather negative report. The good news is that it's ancient history.
The Oil and Gas Inventories reports showed an increase in inventories. This will help keep prices down even if there is increased "tension" in the Middle East. This was a positive report.
The Mortgage Bankers Association (MBA) Mortgage Applications Survey Index jumped 20.5% last week. Much of this jump was due to refinancing of existing mortgages. This was a very positive report. The question is how strong demand will be in coming months. But consumers and demand for housing continue to surprise economists and analysts. Since actual mortgage interest rates fluctuate according to supply and demand, a drop in housing demand will cause a drop in mortgage rates as well and that will stimulate further demand. At least for the near term.
The National Association of Purchasing Managers (NAPM) Non-Manufacturing Business Activity Index leaped up to 50.2% in September. Below 50% means a contraction, above 50% means positive growth. This is only one month and probably does not fully reflect recent events, but it's still a very positive report.
The ABC News/Money Magazine Consumer Comfort Index rose to +1 in the week ending September 30 from -1 in the previous week. This is a very positive report, considering recent events.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL only 2.70% on Wednesday to 33.13, which is in the middle of the high anxiety zone. Given the significant market rally, you would have thought VIX would have plummeted. This suggests that much of the rally was short covering and that the "pros" were not "fooled". The next two days will show who's right. VIX rose on the open and stayed up until 11:45 a.m. and then trended down modestly until about 2:45 p.m. and then reversed and crept up again into the close.
The Nasdaq-100 After Hours Indicator started the Wednesday evening session with a negative bias (profit-taking after a great day), but quickly reversed and closed up 2.77 points. Not a bad showing. Shell-shocked optimists were tempted out of their foxholes.
Check Point Software (CHKP) gave a confusing preannouncement, but the after-hours market seems to like what they heard. The company is going to come in close to the consensus earnings estimate (depending on whose estimate you look at), but lost a week of revenue due to recent events. Basically, they said they did better than could have been expected.
Fed Funds futures suggest a 90% chance (up from 80%) of a quarter-point cut in interest rates at the November 6 FOMC meeting and a 40% chance (down from 46%) 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. But, a lot can change in a month.
Whether the market has finally turned the corner remains to be seen. Even if the market shows real strength over the next few days, it could still turn into another April-like rally (lasting no more than a few weeks) that fizzles and suffers a further relapse.
If we can just squeak through a few days without major selling, we could do okay. Ultimately it comes down to whether more than a few retail investors can be conned into shifting some of their bond fund assets into stocks. Hedge funds and institutional investors can pour in all the money they want, but they'll just take it all back out when momentum peters out.
Personally, I'm just sticking with my weekly dollar-cost averaging program and an occasional bargain buy.
Jack Krupansky
Updated: October 04, 2001 12:07:34 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology