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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 "throw in the towel" kind of day with Nasdaq heading deep south and closing at the low for the day. You could blame it on the anthrax scare here in Washington, but that was just an excuse to refrain from buying.
Once again, the media (and market) frenzy over anthrax is way overblown. There are a lot of people being reasonably cautious and that makes it SEEM as if the problem is worse than it really is. The fact that Congress is recessing until next Tuesday heightens the perception that there is a big problem, but again, the reality is simply an excess of caution. There was a bit of confusion and conflict in some reports and that only added to anxiety levels. The market does continue to be plagued with the "shoot first, ask questions later" mentality. Or so it would seem. I'm not so sure. I'm thinking that the main problem on Wednesday is that buyers had already bought on the preceding few days. A lack of buyers gives the shorts a great excuse to exploit any and all "reasons" to sell and momentum buyers from previous days simply lost patience.
Greenspan's testimony seemed to be mostly a non-event as anthrax "took control" of the market. His main message seemed to be that Congress should refrain from too much in the way of "quick fixes" to "jumpstart" the economy. Any attempt to merely pull future economic activity into the near future will be counter-productive compared to approaches such as a reduction in the capital gains tax which would enhance long-term growth.
The one thing that was clear in yesterday's market was that it wasn't a case of day-traders shorting, since they would have had to cover their shorts before the close and there was no late-day buying.
Another possibility is that momentum buyers bought in the "pre-market" in anticipation of a "great day". When it became apparent that there were not a lot of buyers, coupled with the anthrax "news", those "early bird" buyers dumped their positions. The Nasdaq Pre-Market Indicator (PMI) was up 35.13 points, which is a lot. With that kind of unreasonable expectation, it's easy to get disappointed real fast.
The ABC News/Money Magazine Consumer Comfort Index for the week ended October 14 deteriorated to -3 from +2 last week. That's on a scale from -100 to +100. This is a negative report. But mostly this is a statement about about how lousy the economy is right now. Consumer confidence is important, but we're likely to see it bounce around for a while. Consumers are being bombarded with messages from the media, but ultimately it's a question of whether they keep buying or not.
The Mortgage Bankers Association (MBA) Index of Mortgage Applications advanced by 18% in the week ending October 12. Much of this was due to re-financing of existing mortgages. This is still a positive report.
The New Residential Construction report for September showed a slight gain over August. This is a positive report. So, builders are continuing to build. The question is whether consumers will continue to buy. Time will tell.
The Oil and Gas Inventories report for the week ended October 12, showed a sharp drop in crude oil inventory, but an increase in both gasoline and "distillate" inventories. This ends up as a wash. I'd rate it as a neutral report.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE 4.32% on Wednesday to 36.74, which is in the very high anxiety zone. This is a step back from Tuesday, but not that much compared to the market action. VIX fell to 34.23 at 10:00 a.m. as there was early enthusiasm for stocks, but then popped up above 35 on the latest "episode" of the anthrax scare and then trended steadily upwards right into the close as people threw in the towel. This was a moderately bad day for VIX, but not bad enough to suggest that a continuation of the rally is out of the question.
The Nasdaq-100 After Hours Indicator for the Wednesday night session was another rollercoaster ride with most of the first half in negative territory, but then reversing and taking on a strongly positive tone, to close up 3.46 points.
Broadcom (BRCM) is expecting a 5% rebound in revenues this quarter.
Lots of tech companies reported earnings at or better than expected. Some beat revenue estimates and some came in short. Outlooks varied as well. Overall, the results were mixed. But, most importantly, overall it just did not seem like these companies were providing reports and outlooks a lot worse than expected. As long as the reports (and outlooks) are within the realm of reason, the market should accept them and move on. It may be that market participants want to get all the big really big ones, including Microsoft (MSFT) tonight, out of the way before "committing" to a continuation of the rally.
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.
Lawrence Lindsey, President Bush's top economic adviser, said yesterday that the events of 9-11 would probably result in slightly negative growth for both Q3 and Q4 (meeting the common definition of a recession). But, he did predict "normal" growth by Q2 of 2002. I'm looking at the situation on a monthly basis, which is what the National Bureau of Economic Research (NBER) does. NBER "calls" recessions well after they've begun (and even ended), but they use monthly data instead of simply quarterly GDP. According to their most recent "update", dated October 8, NBER is still not committed to a recession. Their rationale is that employment still has not fallen sharply enough yet. A slight dip is not enough for them to call a recession.
The latest weekly Jobless Claims report comes out today and isn't expected to be pretty. I'll look at it closely, but mostly I'm waiting for next week's report which will tell us how things are shaping up from October 15 and on.
After yesterday's sell-off, my "buy on dip" trigger finger is getting twitchy. If the market is weak on the open today, I'll be a buyer of LEAP call options on the Nasdaq-100 Tracking Stock "Qubes" (QQQ). If the market is down even further near the close, I'll buy even more then. I think I have a handle on this anthrax stuff, so I'm prepared to exploit any market weakness that results from it.
The recent rally MAY continue to unwind. If so, it is still only a question of time before it finally gains traction and heads up in a sustainable manner. I'm still not prepared to commit all my investable dollars to stocks, but I'm more than willing to keep gradually, but slowly, adding to my exposure.
Jack Krupansky
Updated: October 18, 2001 12:21:01 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology