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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.
Monday's Nasdaq action looked like a repeat of Friday with a classic case of day-traders shorting the market and then having to cover their shorts to get out by the close. Some analyst downgrades gave the market a negative tone at the open, causing reluctant momentum traders to dump some of their positions. But all of that negative action was done by 10:00 a.m. when dip buyers came in and gradually dragged the market fitfully up to almost a flat finish. It was quite a tug-of-war, but the up-trend was rather dramatic. Obviously there was a little net selling, but only a little. It almost looks as if the early-bird momentum traders from last week are getting replaced with more serious, longer-term money. That's a very significant development.
The only economic report on Monday was the Business Inventories report for August. It showed a slight decline in inventories, a slight increase in sales, and the ratio of inventories to sales held constant. This was a slightly positive report, but unfortunately it is ancient history. The September report, when it comes out in November will also be ancient history. In fact, it may not be until we get the November report in January that we'll get hard data for business inventories after the 9-11 events and their immediate impact.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE 1.95% on Monday to 37.16, which is well into the very high anxiety zone. VIX leaped on the open and by 10:15 a.m. hit the high for the day of 38.54, but then fell quickly back to 38 and stayed roughly flat until 1:15 p.m., when it began to fall off a bit into the close as the recovery rally continued. The bottom line continues to be that many market participants are still very suspicious of this rally and are anxious to protect their gains by buying "put" options on S&P futures. It continues to be very interesting that VIX is staying at such an elevated level even as the market stays fairly flat. This would appear to be a positive sign, unless a new shock sents the market downward. This elevated, but relatively range-bound, level for VIX looks a lot like the kind of "wall of worry" that a bull market likes to climb.
The Nasdaq-100 After Hours Indicator started the Monday evening session with a fairly neutral tone before heading south, closing down 7.67 points. Disappointment in the Novellus (NVLS) quarterly report just snowballed. There was no sign of optimism. But I'm not so sure Monday evening's market action was really very thoughtful and considered.
Personally, I thought the Novellus (NVLS) quarterly report was fairly decent, considering the slump the chip equipment sector has been in and the impact of the 9-11 events. Management said they saw almost no order cancellations in Q3 and were forecasting revenue growth in Q4. But, for some reason, this was not good enough for various market participants. Maybe it was the talk about how ruthless price competition had gotten. I'm skeptical of the initial market reaction. Better to wait and see how the market reacts during the day.
Fed Funds Futures suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting and a 55% (up from 18%) chance of a quarter-point cut at the December 11 FOMC meeting. The likely scenario is a quarter-point cut at both meetings, but the odds of the second cut will flip-flop a lot until after the November meeting.
I made my dollar-cost-averaging (DCA) purchase on Monday of January 2003 LEAP call options on the S&P 500 Tech Sector "Spider" (XLK). Since they are getting pricier, I bought a strike price that was a couple dollars "out of the money" (26). I did the buy around 9:48 a.m., so I got a decent price. I normally try to buy around lunch time, but since I was going to be busy and the market looked like it was going to open down sharply, I made my purchase early.
I also bought a January 2003 LEAP call contract on the Nasdaq-100 Tracking Stock "Qubes" (QQQ) at 9:40 a.m. and another at 10:00 a.m. since I thought the market had irrationally sold off so strongly at the open. I bought a strike price that was just barely out of the money. The real reason I made the first purchase was that the XLK options were not pricing at that time due to the extra activity in the market. XLK includes NYSE stocks (like AOL and IBM), and on a busy day it can take a while before the market "opens" for all the popular NYSE stocks. So, XLK itself can't price untill all the component stocks have priced and only then can the options start pricing. QQQ does not have this problem since it is pure Nasdaq. And I usually don't have this problem since I usually buy in the middle of the day.
The jury is still out on whether the bulls will abandon this rally and let Nasdaq "retrace" the rally back to the low. Personally, I think the Nasdaq rally is just "building a base" in the vicinity of 1700. The rally was a little too much a little too quickly, but with a little "rest" where it is, it could resume rallying if quarterly reports this week are not a lot more negative than people expect.
Every anecdote I run into says that the economy is getting incrementally stronger every day. When I went to dinner last night, I had to wait to be seated and the dining room was fairly busy, unlike two weeks ago. I'm down in Washington, DC, right now and on Sunday afternoon I was surprised at how much traffic was on the streets. My Sunday evening dinner restaurant was also significantly busier than two weeks ago. My personal opinion is that we are truly "on the other side" of the decline. Unfortunately, the economic data will continue to show declines until those reports begin to cover periods starting with October 15 and on. And there will be plenty of "lagged" effects, such as rippling of layoffs, but most of these should gradually "decay". It is the job of the stock market to anticipate the eventual path of the economy, months in advance of actual economic reports.
I can't guarantee that the market is going to rally and won't head south, but don't blame me if you wait too long and "miss" the rally. It's also very possible that the market will "hover" for a while, take a quick dip to "throw off" the "amateurs", and then rally strongly. There are so many possible scenarios. Each investor has to decide their own perception of the risk of loss versus the risk of missing out on a gain. Good Luck.
Jack Krupansky
Updated: October 15, 2001 11:30:19 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology