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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.
Day-trading short sellers tried to exploit the weakening of the rally on Friday and had a great start, but couldn't get any traction after 10:30 a.m. As much as the shorts believe the market is "ripe" for a further fall, they had to accept the fact that there was a "risk" that something "good" might happen on the weekend (e.g., successful military action.)
Although the very weak rally follow-through on Thursday and Friday was rather disheartening, it was in fact quite heartening that the market hung in there as well as it did. In fact, it's quite amazing to see such optimism in the face of such incredible uncertainty.
The Employment Situation report for September was quite gloomy. Even worse, this data is for BEFORE the events of 9/11. But the transition from the Summer vacation season to the Fall school season makes it difficult to tell which service jobs were really "lost". In any case, it is all ancient history now. Still, it is a very negative report. On the bright side, we have already seen and experienced the economic impact of that month. Although jobs will continue to be lost in coming months, the peak weekly loss will probably happen this month and the rate of decline will diminish from there. Note that jobs will continue to be lost even after a recovery has set in. In fact, jobs will be lost until the rate of real growth of GDP is greater than the rate of productivity growth. That could take until Spring.
The Economic Cycled Research Institute (ECRI) Weekly Leading Index (WLI) declined to 115.5 from 116.5 the previous week. This is a rather negative report. It is issued weekly, so it is not ancient history. According to my hypothesis, we may see this indicator trough and turn up in November or December.
The Consumer Credit report for August showed only a very slight increase in the debt burden of consumers. This is a neutral report. I'd like to see consumer debt reduced, but the slow growth suggests a greater chance of a recession as consumers borrow less.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE 1.10% on Friday to 34.78, which is still in the upper end of the high anxiety zone, but just below the very high anxiety zone. VIX jumped on the open and spent almost the entire day in the very high anxiety zone (above 35) until the last half hour of trading. VIX had kind of a "spike" at 10:30 a.m. and that may have been treated by traders as a minor "capitulation". VIX trended down nicely after that. Still, there are a lot of people worrying and not very confident that the recent rally was "real" and will continue. VIX might be artificially misleading with the possibility that people are not so much "worrying" as hoping to profit from any "bad" events that might happen over the weekend.
The Nasdaq-100 After Hours Indicator had a positive trend during the Friday evening session, closing up 2.06 points. It was an uneven session with a few times when the indicator was down and each gain was preceded by a fall from the previous gain. The market has a mixed view with neither the cynics nor the optimists having a clear upper hand. Still, the Friday evening performance was reasonably positive given the uncertainty of the weekend and week ahead.
Fed Funds futures suggest a 100% certainty (unchanged) of a quarter-point cut in interest rates at the November 6 FOMC meeting and a 56% chance (up from 44%) of another quarter-point cut in December. There is a slim 5% chance of a half-point cut at the November meeting. The likely scenario is a quarter-point cut at the November meeting and another quarter-point at the December meeting.
Although we do have some quarterly reports coming out this week and probably a whole new wave of preannouncements, the story is the same as it has been for the past nine months: ignore the current reports and pore over the outlook with a fine-tooth comb. Due to recent events, this process is even more important and more difficult. It's simply too early for any of our tech companies to be making dependable prognostications about business in November, December, January, and February. But it's exactly that kind of forecasting that the market needs and will supply. If management can't provide it, the market will. Management has a fiduciary obligation to "talk straight" and be conservative, so don't expect them to be able to offer accurate forecasts when the short-term effects are still "evolving". Better to let the market do the forecasting. There are thousands of analysts and money managers and millions of traders and investors. They (we) all have access to an incredible amount of information and it is up to them (us) to "add it all up" every single day (and every moment of every day) and use our financial resources to "vote" for whether the current market "forecast" (stock price) is too high or too low.
A key part of forecasting the market (or setting a valuation) is how to "discount" uncertainty from stock prices. The uncertainty is simply a price range. Cynics always aim for the low end of the range, optimists for the high end. The market simply adds up and "averages" all of those "estimates" on a tick-by-tick basis. The two open questions are: 1) how will sidelined money eventually "vote" (and when) and 2) how will current stockholders change their votes to become more or less cynical or optimistic as the marketplace "evolves"?
It's Monday, so I'll be doing my next dollar-cost averaging purchase of January 2003 LEAP call options on the S&P 500 Tech Sector "Spider" (XLK). These are still very small purchases. I won't up the size until my tech stock "safe" index starts to show some real action.
It will be interesting to see if many of the recently laid-off workers start poaching from their 401(k) accounts. On the other hand, since so many people have switched to bonds, those redemptions might not have much significant impact on the stock market. Some people who still have jobs and are still funding their retirement accounts may begin to shift a little of their funds to stocks if the rally holds up a while longer.
Another interesting thing for this week is whether the market focuses on the apples (lousy, short-term news) or the oranges (outlook six months from now). The market bounces back and forth between the short-term need for "liquidity" (cash) and the need to get longer term rates of return that are better than bonds. The battle between these two "forces" will continue. It's what makes the market so interesting.
It will also be interesting to see how the market responds now that military action has finally been initiated. There is one school of thought that says the market will respond negatively to any news of "conflict". Another school says that bold, confident action deserves a positive market response. I lean towards the latter.
There is no urgent reason for the market to decline today, but if it does it will only mean that I get a better price on my dollar-cost-averaging program. It never hurts to be prepared to take advantage of any "unnecessary" market decline. If the market declines more that 50 points, I'll probably make an extra purchase of options.
If the market declines this week, it could well be due to profit-taking after the recent rally or disappointment over the inevitable warnings that will be bombarding the market this week. This will make it difficult to discern which of the negative forces is having the more dramatic negative impact.
And don't count out a continuation of the rally just yet.
In any case, I give the market (and the economy) another week of "grace period" to sort things out. Then we should start seeing what the "real" economy is actually like, as well as the "real" market. Any rally or relapse this week should still be considered suspect since it really is too early for people to have fully digested and extrapolated the impact of recent events, especially on consumers. I have great faith that American consumers will pull through far stronger than most commentators give them credit for.
Jack Krupansky
Updated: October 08, 2001 12:11:53 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology