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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.
I thought it was impressive that Nasaq stayed in positive territory from 10:00 a.m. through the rest of the day. There was a little upwards tail at the close, which suggests that day-traders had been aggressively trying to short the market. The net result was that we did have some buying and the rally did not wilt as the plethora of issues and anxieties would suggest it should.
Nasdaq is now sitting cleanly above its 50-day moving average. Traders will "test" it to see if people are a little too willing to engage in profit taking. But, who knows, it may hold up. If people can sense that REAL buyers are creeping into the market, then the rally could continue for a while.
The Fed Beige Book was about as expected. It was a negative report, but gave no real surprises. It covered September and the first weeks of October. It reported "weak economic activity". After a "short period of sharply reduced activity" following 9-11, business activity "recovered quickly from some aspects of the shock". But it also notes that "longer-run effects are more difficult to assess."
The Mortgage Bankers Association (MBA) Mortgage Applications Survey for last week showed a sharp decline in all forms of mortgage applications. This was a negative report, but demand for housing was expected to start falling off a bit anyway. And the level of mortgage activity is still very high.
The Oil and Gas Inventories report for last week showed a nice increase, which is bad for the oil and gas guys, but great for the rest of us and will help to keep inflation and costs under control. This was a positive report. The good news is that imports are being maintained despite the turbulence in the Mid-East. Iraq is keeping a very low profile these days. I wonder why. And the Russians are pumping plenty of oil so that OPEC is, basically, over a barrel.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL a slight 0.96% on Tuesday to 32.87, which is in the middle of the high anxiety zone (30 to 35). VIX rose sharply at the open but then pulled back somewhat and maintained a rocky downtrend into the close. Yes, anxiety fell off, but not much, and it didn't give ground easily. People STILL are not willing to believe that the world is safe and that the rally is real.
The Nasdaq-100 After Hours Indicator started the Wednesday evening session with a negative bias, but eventually reversed and ended up 0.59 points. This is still a fairly flat performance. In other words, people STILL are not sure if they think the market should go up or down. That's fine for now. Better to let this potentially nascent bull market climb its wall of worry at a slow, steady, but determined pace.
Who can figure out whether the quarterly reports are "good" or not. Mostly what we know is that a lot of dramatically reduced numbers were met or exceeded. But there has still been a lot of reduction in guidance for Q4.
Fed Funds Futures continue to suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting. There is also a 74% chance of an additional quarter-point cut at the December meeting.
Microsoft (MSFT) Windows XP is due to be launched today. Not that the launch day will mean much financially, but sometimes these events have an emotional impact that inspires people to buy the stock. Short-term traders may have some fun playing with the stock.
There is talk that the states in the Microsoft antitrust case are "worried" that DOJ may want to settle the case for far less strenuous terms than the states would like. This is good news for Microsoft. But, these things don't always work out as expected. Besides, the difficulties of the PC sector and the corporate IT sector are far bigger concerns to the company.
Then there's the new Microsoft Xbox game system coming soon. It could in fact start things moving. After all, it is something completely new, and rather exciting. It could get people out and into the stores and looking at whatever else is on the shelves.
Are we in a new bull market? I'd still give it a 50-50 chance. I would not be shocked if the current rally completely retraced, but I don't expect it either. I would not be very surprised if the rally continued for a while, but I'd also expect occasional down days (like last Wednesday) along the way. Actually, I LOVE those days, since they're a great chance to put a little more money on the table at a lower price. Even better, the more gradual the rise, the better. If we get too far ahead of the 50-day Nasdaq moving average, the traders will turn and try to beat the market back down. And those nasty hedge funds could get tempted to do what they did to the April rally: build it up, sell out to the latecomers, and then short it to death.
Please don't forget the risks of the "war", anthrax, and the prospect of other terrorist attacks. But don't obsess over them either. Life goes on.
Jack Krupansky
Updated: October 25, 2001 01:09:46 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology