| Read Jack's "diary" of life in Washington, DC after the terrorist attack. Click here. |
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.
Tuesday's market action seemed to suggest that people are almost starting to grudgingly accept that the rally is not going to retrace. Trading was very inconsistent, with the high for the day just before 10:00 a.m. and the low for the day just an hour later and then a gradual but fitful climb back to near the high at the close. The cynics refuse to give up (so far), but they are running into fierce resistance and slowly losing ground.
As I suspected Monday night, the market treated the quarterly report for Novellus (NVLS) significantly better than the Monday after-hours trading suggested. This may indicate a new "divergence" of the "traders" and longer-term money that seems to be flowing into the market during the day.
The Industrial Production report for September showed a steep decline, roughly as expected. This was a negative report, but not as bad as could have been expected given both the general weakness of the economy combined with the effects of the 9-11 events. The plus side was that Capacity Utilization (75.5%) is now at its lowest level since 1983 and is having the effect of eliminating supply bottlenecks and helping to keep inflation under control.
The National Association of Home Builders (NAHB) Housing Market Index (HMI) fell to 48 in October, its lowest level since June 1985, from 56 in September. This was a negative report, but consistent with the effects of the 9-11 events. Housing demand was expected to slow after the summer anyway. On the plus side, NAHB does says that they are "confident that the housing market will stabilize in the first part of next year following a modest decline in the third and fourth quarters of 2001 and that housing is strategically positioned to play a major role in the nation’s economic recovery."
Automobile sales have been doing well in October. Great deals on financing are a big help.
I continue to believe that October will be the trough month for the economy and that we will see the beginnings of strengthening of the economy in November and December.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL 6.21% on Tuesday to 35.04, which is just barely still in the very high anxiety zone. This is a significant improvement and shows that people are starting to warm to the idea that the recent rally will "stick". VIX was down a little until 10:30 a.m. and then spiked up to 37.89 around 11:00 a.m. before beginning a nice steady decline right into the close. This performance is a good sign for the bulls and bad news for the bears. The fact that VIX is still way up means there are plenty of people who can still be converted to buyers. This is the "wall of worry" that a bull market can "climb".
The Nasdaq-100 After Hours Indicator for the Tuesday night session was quite a rollercoaster ride as there were conflicting interpretations of the quarterly reports, but in the end, was up a very strong 16.01 points. The indicator started with a slight positive bias, then reversed and became very negative, but then reversed again and took an even stronger positive bias. How the market will act during the day is still anybody's guess. I am increasingly sensing a divergence between traders who have either a knee-jerk reaction or a clinical reaction to the fundamentals versus the people with real stock or money who have to make a "gut feel" decision what stocks will give good return in coming months. The latter are increasingly taking control of the market. If anything, any action before or after hours is quickly "attacked" when the market actually opens.
I glance at the quarterly reports, but I consider much of it ancient history and don't have ANY faith that the forecasts of management will have much relevance in such a dynamic economic environment. If anything, management has been chastened severely over the past year and is more likely to be excessively conservative than their salesman-like nature would normally admit. In other words, don't be surprised if the market ASSUMES that companies will do better than even the latest forecasts.
I am assuming that Q4 results will be lousy, even before Q3 results are fully out. Whether the market has fully priced in that level of gloom is debatable. What the market really has to do is estimate how bad Q3 and Q4 are going to be and then project forward where results will be in six months. That will determine how much of a rally or correction is needed to reflect the new economic reality.
Fed Funds Futures suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting (only 20% chance of a half-point cut) and a 55% (unchanged) 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. A possible scenario is that the Fed will continue to cut at every meeting for "insurance" until we see the economy "clearly" back in a growth mode.
The market seems to be adapting well to all the anthrax "scares". I'm here in Washington, D.C., and went to a hearing in the Senate office building that adjoins the Hart building where the letter was opened on Monday. I was attending a hearing of the Senate Banking Committee that was looking into the handling of the failure of Superior Bank. This hearing had originally started on September 11 but had been recessed when the building was evacuated shortly after the attacks. Yesterday's hearing started late since the senators were being briefed about the anthrax scare. Afterwards, I wandered over to the Hart building (they are joined together with passageways on every floor) and everything was fairly calm with people going about their business. Only a corner of the building where the letter had been opened had guards and yellow tape, but most of the building was quite accessible. Getting in and out of the building through security was about as usual, unless you had a package. I just read in the news that there was a suspicious letter found at the Australian Embassy which is across the circle from my apartment building. The point is that enough of these scares have occurred and few enough people infected, that they're now nowhere near as noteworthy as last week. Some short-term, "shoot first and ask questions later", traders will continue to exploit the reports, but their potency is now minimal.
Greenspan will be testifying before the congressional Joint Economic Committee today to "examine monetary policy in the context of the current economic situation". I'll be there.
I don't think ANYONE has ANY clue what Q3 quarterly reports should really look like, especially give the 9-11 events. The market may pause while all these reports are pending, but it is just as likely to rally in relief as more of the reports are out of the way. It doesn't matter whether they're good, bad, or ugly, just as long as they're out of the way.
As a closing thought, remember that whatever direction you think the market is headed, it never hurts to hedge your "bet", at least a little. I may be an optimist, but I'm still not ready to switch all my treasuries to stock.
Jack Krupansky
Updated: October 16, 2001 11:04:59 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology