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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 (end of this week) when the new wave of layoffs peaks.
SOMEBODY decided to do more a little buying on Monday. Not a lot, but enough to blow away a bunch of short sellers. Not just day-traders, but shorts who may have been hanging in there hoping that Thursday and Friday's gains were not durable. The little upwards tail at the end of the day for Nasdaq is typical of short day-traders buying to close out their short positions. The "real" buying could have been from "normal" money managers, but just as likely could have been from hedge funds looking to make a quick buck by forcing a "short squeeze". Now we're back to the eternal question of whether there will be any significant follow-through buying. If not, the bears will come back with a vengeance.
The Conference Board Index of Leading Indicators for September showed a sharp decline. No real surprise here. This was a very negative report, but explainable due to "one-time" (hopefully) events in September. As negative as this report was, it doesn't change my view that we may be near, if not already beyond, the turning point for the economy. Only reports covering periods after October 15 count, at least in my book.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL 7.62% on Monday to 33.11, which is finally back down in the high anxiety zone (30 to 35). VIX rose a little on the open, but by 10:30 a.m. was back where it started and headed fairly steadily downwards right into the close. This is a BIG improvement in the anxiety level. And this is two consecutive days of improvement. And on a day when two more deaths are being attributed to anthrax. But, VIX is still in the high anxiety zone. That's okay, since a bull market loves to climb a wall of worry. Are we finally in a new bull market? I'd say there's a 50% chance. But even if we are, that doesn't mean there won't be sharp corrections like last Wednesday.
The Nasdaq-100 After Hours Indicator fell a slight 0.69 points in the Monday evening session. After the "big" gain during the day, it's actually surprising that there wasn't a bigger pullback after hours. Quarterly reports weren't so hot and there were some fairly significant warnings for Q4. Not really much in the way of actually positive news.
Fed Funds Futures continue to suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting.
As usual for a Monday, I made by weekly dollar-cost averaging (DCA) purchase of LEAP call options on the S&P 500 Tech Sector "Spider" (XLK). I did move out to 2004 but kept to a strike price of $22 (XLK closed at $21.73). The premium wasn't too bad.
The big question about the market is whether we're stuck in a "trading range", waiting for some kind of confirmation about the direction of the economy. My suspicion is that we'll get enough anecdotal reports of slight improvements over the next two months to keep "hope" alive until we get solid economic data for November. There'll be plenty of really negative reports over that period, but it's a question of how the balance between the negative and positive is trending. In any case, I'm still not ready to bet the farm on this thing even as I continue to incrementally place more money on the table.
The traders will be focused on whether Nasdaq can finally "take out" it's 50-day moving average. It did that briefly on the open last Wednesday before anthrax took control of the market. Yesterday, Nasdaq closed almost exactly on its 50-day moving average. If the market can rally a little further without pulling back, the traders will use that as an indication that it's safe to throw more money at the market.
Jack Krupansky
Updated: October 23, 2001 12:02:52 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology