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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.
Wednesday was a very BAD day... for the bears. Sorry guys. Although the media offers a long list of "reasons" for the rally, my theory is that there just weren't many sellers left after Tuesday's rout and that lack of selling inspired the momentum bulls and possibly a little sidelined cash to do some buying. And that buying was enough to force the bears to cover their shorts (i.e., buy back the stock they had previously sold short). Not every bear exits at the same time, but the longer they wait, the worse their pain gets. The fact that Nasdaq closed at its high for the day is either very impressive or a sign of desperation on the part of the short bears. Now we're back to the eternal question: Will there be follow-through?
The ABC News/Money Magazine Consumer Comfort Index moved up to +2 for the week ending October 7 (before the military action began) from +1 the previous week. This is a very positive report. The survey showed that consumers believe the economy has gotten worse but that their own personal finances are better than the previous week. That apparent conflict is explained by the way the media influences people's thinking about the world outside their own immediate lives. The media coverage of the economy is very negative, so that's what people tend to believe. But people don't need the media to understand their own financial situation.
The MBA Mortgage Applications Survey Index moved up sharply last week as lower interest rates inspire significant mortgage re-financings. This is a very positive report. The downside is that demand for purchase mortgages has declined sharply, but that has been expected to happen for some time anyway. We weren't going to depend forever on housing demand to hold up the entire economy. The same amount of money is out there, so instead of housing it will find another "target".
The Wholesale Trade report for August showed an increase in sales and a decline in inventories. The ratio of inventories to sales dropped to the lowest level since February. This is a positive report, but it's also ancient history.
So, we did great yesterday on the economic fundamentals front. Good enough reason to inspire cautious money managers to dribble a little more money into the market. And to give the bears a reason to pause, for a day.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL 6.92% on Wednesday to 33.50, which is in the middle of the high anxiety zone. VIX had a strong downtrend until about 1:00 p.m. and then was almost perfectly flat through the close. That's a big improvement, but fact that VIX did not fall more, especially as the market rallied strongly from 2:30 p.m. through the close, suggests that many market participants are still quite skeptical about the durability of this rally. Give the market another couple of days to clear up the "confusion".
The Nasdaq-100 After Hours Indicator was a little shaky in the early part of the Wednesday evening session, but quickly took on a strong positive bias and trended up to close up 5.47 points. Overall, quarterly results, outlooks, and preannouncements were better than the worst-case scenarios, so everyone (but the bears) breathed a sigh of relief.
Fed Funds Futures suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting, a 10% (down from 15%) chance of a half-point cut at the meeting, and a 52% (down from 56%) chance of a total of a half-point cut by the end of the year. The likely scenario is a quarter-point cut at the November meeting and another quarter-point at the December meeting.
There was a minor flap about Microsoft (MSFT) potentially being fined by the European Commission (EC) for $2.5 BILLION. I read the news report early in the morning (well before the open) on Reuters and CLEARLY it said that it was too early to tell and that the number was an absolute maximum. The EC "competition" commissioner even felt the need to correct the misunderstanding in a news conference. In any case, there was nothing "actionable" in this news, unless you're a "shoot first, ask questions later" kind of trader.
I'll be maintaining my short-term economic outlook until we start to get "data" for the period from October 15 on. The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) that comes out on Friday, October 26 will be its first report that includes data from all of the week of October 15. So, on Monday, October 29, I'll be able to present my revised short-term view of the economy. Until then, everything really is almost pure speculation. I still view November as the month for true stabilization. I also continue to have absolute faith that American consumers will continue to hold up stronger than analysts and the media give them credit for.
Tonight we get the latest weekly report from AMG Data Services on flows in and out of mutual funds. If there were additional inflows, that would be the second week in a row and suggest a trend. Flows are probably going to continue for some time to be too sluggish to yield a "smooth" rally, so expect a lot of off days even when we can string a couple of up days together. And expect the bears to refuse to concede the fight until it becomes time for them to begin their "Winter hibernation".
Oh, and the "war"? Well, just ignore it for now. It's too confusing to figure out what's really going on and we don't have a "game plan" to measure progress against even if we had good reports. The Anthrax scare in Florida is in fact real, but limited enough to be only a minor concern. Talk of the potential threat of a Smallpox attack is just that, sheer speculation. I did attend a congressional hearing back in July that reviewed a simulated, nationwide Smallpox attack. It was called "Dark Winter". But it's not believed that anyone besides Russia has any quantity of "weaponized" Smallpox. I went to another congressional hearing three years ago where a Russian defector who had been in charge of their Anthrax program mentioned having direct knowledge of weaponized Smallpox in Russia. In any case, the threat is only potential. If you like agonizing about all potential threats (like earthquakes, tornadoes, and meteorites falling through your roof), go ahead. Just be responsible enough not to exaggerate the "potential" to those around you.
Jack Krupansky
Updated: October 11, 2001 12:24:59 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology