| 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.
Short-term economic outlook: As November progresses we will gradually start to see the first signs that the economy is beginning to recover. Not a large increase, but at least the trend will not be downward. December will be a little better. But, October was probably bad enough that Q4 will "print" as a decline in GDP. Employment will continue to fall until GDP finally breaks above the rate of productivity growth, sometime in Q1 of 2002.
Nasdaq lost only a tiny bit of ground on Friday (down 0.37%), although the trading action was very uneven. One reading is that the whole day was just day-trading with only a tiny amount of real selling. Another reading is that despite the looming weekend during a "war", people were happy to just sit tight with their positions and didn't feel the need to sell. There was a distinct negative bias to much of the trading, but it just didn't have much conviction with every sell off being met with a rally. In any case, it was a good sign that there was no significant sell off of the recent rally.
Many traders probably feel that Nasdaq is a bit "overbought" and due for something of a correction. Whether we really have a substantial correction will depend on whether investors, not traders, decide to pump more money into the market as they gain confidence that the country and the economy are prepared to deal (or at least cope) with follow-on terrorist attacks.
The University of Michigan Consumer Sentiment Survey for October showed a slight increase over September, but a slight decrease from the preliminary October reading. Blame anthrax and news of layoffs for the lack of further recovery in confidence. Plus the inability of most people to sense how the "war" is really going. Still, this was a positive report.
The New Home Sales report for September showed a 1% decline from August. This was a slightly negative report, but did come in stronger than expected. But it does not fully reflect the impact of the 9-11 events.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) for the week ending October 19, showed a decline. This was a negative report, but it could have been worse. We may just be seeing "noise" fluctuations at this point.
The economic data was still too weak to conclude definitively that we really are past the turning point.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL 2.72% on Friday to 30.53, which is now at the lower end of the high anxiety zone (30 to 35). And this is despite the fact that Nasdaq declined slightly. This suggests that people are a little more able to believe in the durability of the recent rally since it didn't fall apart on a Friday before a weekend during a "war". A little more confidence seems to have returned to the market. For how long, remains to be seen. VIX did rise at the open and hit a high for the day of 32.57 shortly after 10;00 a.m. before beginning to decline. Still, it wasn't until 12:45 p.m. that VIX was finally below the Thursday close and then trended down into the close.
The Nasdaq-100 After Hours Indicator immediately took on a fairly negative bias in the Friday evening session, but gradually narrowed the loss and closed down just 0.65 points. That may just be a statement that nobody wanted to venture a guess what kind of news would come out over the weekend, good or bad.
Fed Funds Futures continue to suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting as well as close to a 100% chance of a quarter-point cut at the December meeting. A half-point cut at the November meeting is possible, but not likely, at this point. The Fed is divided right now, but has no choice but to keep feeding the economy money until some solid stabilization and the beginnings of growth are seen. But then in 2002 it's only a question of how quickly some of the last rate cuts get taken back. That may be what finally forces companies to borrow and spend: the prospect that money will get more expensive in the near future.
The Organisation for Economic Cooperation and Development (OECD) says that global economic growth is likely to bounce back by mid-2002. They are forecasting growth in the U.S. of 1.3% in 2002 and then 3.7% in 2003. What growth will likely be, of course, is anybody's guess. I'm sure their "models" are mathematically very sophisticated and rigorous, but it's all a matter of what "assumptions" you feed into the models. You know, little things like how will consumer confidence trend and how will that trend translate into spending. Actually it may be easier to forecast further in the future, like Q3 of 2002, than the near-term, like Q4. It's a matter of trying to forecast in a less stable environment where the hard data is less stable then the wild-guess assumptions.
You tell me, is the anthrax scare/crisis "widening" or dissipating? Yes, cases continue to come in, but not in any clear up-trend. The two postal deaths were very unfortunate since postal workers should have been tested ASAP when the Daschle letter was found. Anthrax spores don't "die", so they'll continue to get moved around and found until health officials stop looking. But as the remaining spores disperse, the concentration goes down even further. For some time now, the reports of new findings of spores have been of "trace" or "medically insignificant" amounts. To label the scare/crisis as "widening" seems a bit too extreme, to me. Mail workers need screening and protection. And high-profile recipients need to be vigilant. But that seems to be almost all that's needed for the "response", plus the investigation to find the "responsible" parties.
The media are already touting the "ugliness" of the economic data reports expected this week. It's not too risky to suggest that the market has already discounted the ugliness, what I call the short-term "bad apples", and is focusing instead on the six-month "sunny oranges" outlook of the presumed recovery. Yes, the winter is going to go rather slowly, but it's one of those times when it just takes a little while to turn a super-tanker economy and the slowness of the turning process should not be used to question the inevitability of the turn. We'll be pointed in the right direction soon enough. Just be patient. Surprisingly, the market has shown an extraordinary level of patience in these extraordinary times.
Nasdaq is still poised slightly above its 50-day moving average. Traders will continue to "test" the market for weakness until either a sell off occurs or the rally continues. It's okay to occasionally have days like Friday where there's a tug-of-war with little net movement. This lateral or "sideways" action in the market is considered a good sign of "building a base" on which a further rally can be built. The fact that the base "holds" in spite of continued testing by the traders indicates an unwillingness to sell which in turn inspires further buying.
It's Monday, so it's time for my weekly dollar-cost averaging (DCA) purchase of S&P 500 Tech Sector "Spider" (XLK) LEAP options. Once again, I'm hoping to pick up LEAPS for 2004 since the premium is still relatively cheap and will expand nicely as the market climbs further.
Jack Krupansky
Updated: October 29, 2001 12:21:54 AM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology