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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.
So, there you have it, Nasdaq's response to the start of military action: up 0.65 points. That's as close to flat as you could expect to get. The initial, knee-jerk, negative reaction was way too extreme and had to attract "buy on dip" investors. But the corrective rally petered out before 11:00 a.m. and by 11:30 a.m. short sellers were in control again, until 3:00 p.m. when a steady rise through the close had all the "fingerprints" of short daytraders closing out their short positions.
I suspect the flat result was a combination of some "new" money being attracted from the sidelines balanced against "sell any rally" profit-taking.
Or, think of it as a balance between the people who are worried that we're actually shooting and those who are thrilled that we're finally shooting. Quite an even balance.
Part of the unwillingness to rally on Monday was probably a little bit of "battening down the hatches" to prepare for lousy quarterly reports. Not that we haven't done enough of that already.
Nothing was happening on the economic data front.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE 3.61% on Monday to 35.91, which is now in the lower end of the very high anxiety zone (35 to 40). This was not completely unexpected since it was the first day after the start of the military action. Market participants are obviously a little anxious and maybe fruistrated that the market did not have a strong positive reaction to the military action. On the positive side, there was a slight downtrend in VIX over the course of the day. VIX jumped on the open as the market opened way down. Just before 10:00 a.m. VIX was almost to 37.50, but started to pull back. Then it leaped up to near 37.5 again around 10:45 as the recovery rally ran out of steam. But it quickly pulled back again and then zig-zagged between about 36 and 37 until around 3:20 when it fell fairly sharply into the close. Monday was not a good day for VIX, but give it another couple of days to tell us the true anxiety level.
The Nasdaq-100 After Hours Indicator started the Monday evening session with no clear bias, but a third of the way through the session took on a positive bias and trended up for the rest of the session, closing up 1.94 points. This may have just been some relief that there were no big tech warnings.
Microchip (MCHP) issued an upside preannouncement for both earnings and revenues. Not bad. This is a nice little company with solid products that are obviously in demand, even in this kind of environment.
The Treasury market was closed for Columbus Day, so there was no change in Fed easing expectations. The likely scenario is a quarter-point cut at the November meeting and another quarter-point at the December meeting.
As usual, on Monday I made my weekly dollar-cost averaging purchase of January 2003 LEAP options on the S&P 500 Tech Sector "Spider" (XLK). I managed to catch it on one of the dips.
I also purchased a small position of Applied Materials (AMAT) for a long-term, buy-and-hold account. I had also been thinking about Dell (DELL), Broadcom (BRCM), Brocade (BRCD), QUALCOMM (QCOM), Verisign (VRSN), and Xilinx (XLNX). I picked Applied since the chip sector is more likely to do much better when things do pick up than say the PC sector. And, Applied has a rock-solid market position and is very well run. Xilinx had been my first choice, but I opted for size and stability.
A major cause of the anxiety in the market is the inability of the administration to adequately clue us in on the "itinerary" for our "trip" to "cure" terrorism. They simply are not clear as to whether the high-intensity activities in Afghanistan are going to last a few months or a few years. I saw one news report that suggested months while Secretary of Defense Rumsfeld said "years". I suspect there are extreme conflicts within the administration as to how the "war" should be prosecuted. Obviously they can't predict the precise path of the conflict and should not disclose any details that would "aid the enemy", but they should at least have a sanitized "game plan" to share with the world. Yes, it will take "as long as it takes", but people need to have their expectations set as to whether this will be months or years. I don't think anyone supports a new "Cold War" with extended conflicts such as Korea and Viet Nam. It is precisely this failure to set expectations in a believable manner that is causing market action like we saw today. Everybody is "on their own" to "forecast" how long they think the high-intensity military operations will last. My bet is that the high-intensity conflict will last no more than a few months to be followed by medium-intensity "mopping up" and support for "nation building" to be followed by long term peace-keeping with occasional surgical strikes to deal with any resurgence. The other huge liability for the administration is a failure to communicate effectively their plan or even intent for dealing with Iraq and its existing and developing weapons of mass destruction. We do need to give the administration a lot of leeway in dealing with these issues, but they need to give us (both citizens and businesses) enough information to help us cope as well. It's a tough balancing act and the situation is evolving on a daily basis, but right now the balance just isn't there. Right now the administration has a blank check. If we are not beginning to see tangible "results" in a few months, Congress (and the American people and the stock market) will start squirming. And in one year there's a very important election. The administration must also keep in mind that even the best coalition will only hold up under intense pressure for a very limited amount of time. But, I'm still hopeful that the administration (with a little "gentle prodding" from Congress) will eventually evolve a solution to these issues.
Jack Krupansky
Updated: October 09, 2001 12:08:20 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology