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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 (next week) when the new wave of layoffs peaks.
Thursday's Nasdaq action was a stalemate with minor skirmishes all day and very little net change. At least there was no continuation of the sell-off from Wednesday.
The Jobless Claims report for the week ended October 13 was rather negative. The plus side is that the pace of initial claims did not accelerate very much and was only slightly higher than the week before. This was a very negative report, but not unexpected. Still, I'm waiting anxiously for next week's report which covers this week, which is my target for the timeframe when layoffs should start to decelerate.
The Philadelphia Fed Survey (of manufacturing) for October came in strongly negative. This was a very negative report. But, the six-month outlook improved and suggests increased activity within six months.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE 0.35% on Thursday to 37.36, which is still well up in the very high anxiety zone. VIX jumped up to the 38 range shortly after the open and spent most of the day above 37.50, with a high of 38.56, before falling off right at the close as Nasdaq quickly moved back up into positive territory. VIX still shows that many people are afraid that the rally will completely fall apart at any time. But, that's the "wall of worry" that a bull market can "climb".
The Nasdaq-100 After Hours Indicator was up almost 16 points and then reversed and ended down 3.44 points. I'm suspicious though. It could be that the after hours crowd have gotten burned so badly lately and just decided it would be better to take their profits rather than take their chances the next day. In any case, I'd rather wait and see how the normal market reacts to reports from Microsoft (MSFT), Sun Microsystems (SUNW), and eBay (EBAY).
Now that a hefty chunk of the "big techs" have reported, this would be a good time for the market to start to take a strong position on whether results are on track and whether outlooks are promising enough. I'm still optimistic that the tech business will be dramatically better within six months (April 2002).
Fed Funds Futures suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting. The chance of a half-point cut is 25% (up from 20%). The chance of a quarter-point cut at the December 11 FOMC meeting is 60% (up from 50%). The likely scenario is a quarter-point cut at both meetings.
Federal Reserve Bank of St. Louis President William Poole says that a recession is not a done deal. I agree with him. Even though Q3 will likely show a slight contraction, it's actually possible that Q4 could just squeak by. It all depends on so many factors. Cynics assume that all the factors go the wrong way and optimists assume all the factors go the right way.
AMG Data Services reported Thursday night that for the week ended Wednesday, October 17, $5.0 billion flowed INTO equity funds. That's the largest inflow since June 6. Half went to growth funds. $485 flowed went into technology funds, the first since June 27 and the largest since January 24. $1.3 billion flowed INTO taxable bond funds. $3.7 billion flowed OUT of money market funds. This was a good report. The inflows may not show in the market indices either because the money has not been invested in stocks yet or because selling by hedge funds or institutions has overwhelmed the mutual fund inflows. Even if the latter is the case, it's a good sign that mutual fund investors are warming to the stock market. And it's quite a surprise they're warming to tech.
Since the market was somewhat weak at the open, I did buy some January 2003 LEAP call options on the Nasdaq-100 Index Tracking Stock "Qubes" (QQQ) with a strike price of $35.
I can't guarantee that the Nasdaq rally will continue, but I'm going to keep proceeding on the presumption that it will. Until the market eventually gets into "safe" mode, you're going to keep seeing occasional days like Wednesday, with steep sell-offs. Don't think of them as a bad thing, but as great buying opportunities.
How's the "war" going? Got me. And I take the trouble to read the transcripts of the daily Pentagon briefings. It's almost as bad as watching the stock market. I GUESS we're winning, but it's not clear to me what we've "won" so far. In any case, it's best to just be patient. There is talk that the bombing campaign may wrap up within a month.
I went to a nice restaurant for dinner last night here in Washington and it was packed. I had to wait over half an hour for a table and I had a 9:00 p.m. reservation. I went to a supermarket (Whole Foods) and had to wait 15 minutes to get through the EXPRESS line. New meaning for the phrase "slow economy". Every shred of personal anecdotal economic evidence I have suggests that the economy is in fact gradually picking up.
Jack Krupansky
Updated: October 19, 2001 12:24:48 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology