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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.
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.
Monday's Nasdaq market action was simply down, down, and further down. A nice straight, but downward, escalator. What should we blame it on? Besides anthrax, the "war", the economy, et al. I'd say it was mostly just the lack of any significant buying by money managers and a modest amount of real selling, coupled with momentum traders throwing in the towel. That gave the bears a great excuse to short the market along the way. A more likely reason is that the New York crowd was despondent over the Yankees losses. Clearly there was significant selling, right into the close with every little rally attempt met with more selling. There were rumors to explain the selling, but I would just as soon blame it on hedge fund profit-taking. On the other hand, given lousy sentiment in early trading, momentum traders might have just decided to throw in the towel early on and try again another day. Momentum traders only stay in the market if it looks like the market will keep going up and then exit at the first sign of serious selling.
Maybe the bearish traders just wanted to celebrate Halloween early. Boo!!
Traders are still anxious to seriously "test" the durability of the recent rally and whether Nasdaq can hold above its 50-day moving average which is just barely below the current level of Nasdaq. Traders will clearly test it today, but unless they have a lot of conviction (or there's really bad news on the "war" front), bullish traders could easily force a lot of short covering to keep Nasdaq above its moving average. Nasdaq has closed above its 50-day moving average four days straight now. That's impressive, despite Monday's rout.
There seems to be a lot of anxiety expressed about whether the economy is getting worse. Besides the "ugly" data due to be reported this week, I don't think anything has really changed over the past two weeks in terms of the longer-term outlook. Yes, companies are expressing how bad they think Q4 will be, but they're supposed to do that and are supposed to be conservative to avoid the risk of lawsuits that would charge that their guidance was falsely optimistic. To me, the market anxiety is simply a matter of the daily tug-of-war between the "bad apples" camp that focuses on the short-term and the "sunny oranges" camp that focuses on the six-month outlook. Yesterday the market talked all about the short-term, but made little comment about the longer term. That does not mean the longer term outlook has deteriorated. Be careful not to confuse the apples and the oranges and be clear about which timeframe you're talking about or worried about.
Sometimes the market likes to sell off in advance of expected "bad" reports and then rally in relief on the actual "news". That may be what we started setting up for yesterday. Just because some "pros" on Wall Street may have contributed to a sell off does not mean that's the best path for an independent investor to follow. In any market, there can be "big" days that go against the trend. Sometimes, the "pros" try to throw us off the scent. Whatever "scent" your nose has been following, keep following it until YOUR nose says to do otherwise. No need to run with the herd. Run on your own path, at your own pace.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE 6.09% on Monday to 32.39, which is right in the middle of the high anxiety zone (30 to 35). Clearly the market sell-off convinced people to be a little more cautious and anxious. Curiously, the peak of VIX, 32.70, occurred just before 2:30 p.m. and VIX declined a bit into the close. That suggests that the selling at the end of the day was probably on low volume and was just short-term momentum traders throwing in the towel and therefore not a reason to get more anxious about the market. Of course, even if that were the perception, it could change at any time.
The Nasdaq-100 After Hours Indicator started the Monday evening session with a slight negative bias, but thanks to the Department of Justice "High Alert" announcement, went deep south, closing down 14.7 points. The details, if any, of the alert might be a little more clear by the time the market opens. Or, at least it might become clear that the new "threat" is too nebulous for any of us to focus on. Until al-Qaida is eliminated, we should just assume that we're on a continuous state of High Alert. Even without the alert, there were more than enough tech warnings to give the after hours market a significant negative bias.
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. There may be a 50% chance of a half-point cut at the November meeting, but I'd say that's not likely, at this point.
Once again, I made my weekly dollar-cost averaging (DCA) purchase of January 2004 S&P 500 Tech Sector "Spider" (XLK) LEAP "call" options. I also picked up some more LEAP options on the Nasdaq-100 Index Tracking Stock "Qubes" (QQQ) right at the end of the day when the market was near its lowest point.
I'm perfectly comfortable with the market making these "little" zigs and zags like yesterday, for two reasons. First, by zig-zagging in a "trading range", Nasdaq is building a substantial "base" for any future rally. Second, it shrinks the "implied volatility" of the options I like to buy, which means they're cheaper. Later, when the market does "take off", the increase in volatility (lots of "up" and less "down") will restore the "implied volatility" premium of the options for a nice gain.
Could the recent rally "unwind" all the way back to the September low? Sure. Is it likely? Not really. Maybe a partial unwind, or a "retracement", as they say. Maybe 10% or 20% or even 30% (of the rally, that is). Who knows. If sidelined money decides to get aggressive, the recent rally will continue. If the rally stalls for much longer, even the most patient of momentum investors will bail out. Time will tell. Personally, I'm in a patient, "buy on dip" mood, at least for now.
Jack Krupansky
Updated: October 29, 2001 11:57:07 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology