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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.
Thursday's market action was much cleaner than the day before. After some anxious moments in the morning, the action after 10:30 a.m. was a fairly nice upwards trending "escalator", right into the close. Can't ask for much better. Volume did seem kind of light though. And there were still a fair number of stocks that didn't rise.
How much of the Thursday rally was short covering is anybody's guess. I'd say a fair amount, but not all. I think we're at the stage where each successive strong rally causes a few more hearty souls to be converted to "the cause". So, gradually the short covering will diminish.
And the Thursday rally was despite lousy economic reports. That can be explained by the market selling off earlier in anticipation of bad news and then rallying in relief that the reports weren't even worse. The better than expected jobless claims report may have helped a lot, in addition to the rumors of a possible settlement in the Microsoft (MSFT) antitrust case.
The National Association of Purchasing Managers (NAPM) index for October fell to 39.8 from 47.0 in September. This is a very negative report. A level below 50 means the manufacturing sector is in recession. A level below 43 suggests that the overall economy is in recession. But this report may be misleading due to the extreme, sudden dislocation caused by the events of 9-11. Basically, the report is based on a survey that asks purchasing managers whether they're seeing an increase or decrease in business. It should be no surprise that MOST companies saw business fall off in late September and October. We have to accept this report for what it is, but be cautious about assuming that things will be this bad or worse in a month.
The Personal Income report for September showed personal income at the same level as in August and a sharp 1.8% decline is personal spending. This was a negative report, but reasonably consistent with what we knew anyway. And September is ancient history anyway.
The Jobless Claims report for the week ended October 27 actually showed a slight decline in initial claims and a modest rise in continuing claims. Although this is still a negative report since jobs are being lost, it was an improvement. But, the decline could be merely noise. We'll just have to keep watching on a weekly basis. I'm expecting some stabilization over the next few weeks.
The Construction Spending report for September showed a slight decline. This was a slightly negative report, but good news in that the decline was less than could have been expected. Still, it is likely that there will be a natural decline in construction as projects get completed and fewer new projects are needed.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 3.32% on Thursday to 34.11, which is at the top of the high anxiety zone (30 to 35). This is a distinct improvement, but I would have expected more of a decline given the strength of the rally. But what that suggests is that people are really very suspicious of the strength and durability of the recent run-up. But as a contrarian indicator, a high level of VIX suggests that positive sentiment may be just around the corner. VIX spiked up to near 37 several times from shortly before 10:00 a.m. when the NAPM report came out until about 10:30 a.m. and then began a fairly steady downtrend for the rest of the day. But it wasn't until 12:45 p.m. that VIX was down below its Wednesday closing level. With all the bad economic data in the morning, people were more than a little skeptical of the rally. There was a little spike right at 3:00 p.m. as it looked like Nasdaq was going to fall through the 1730 resistance level, but VIX fell sharply from there into the close as Nasdaq rallied strongly after the 1730 level held up well.
The Nasdaq-100 After Hours Indicator took on negative tone for the entire Thursday evening session, closing down 5.41 points. I'd chalk it up to mostly profit taking after a big rally and people still not willing to believe that this rally is real and will continue.
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 is now less than a 50% chance of a half-point cut at the November meeting, so I'd say that's not likely.
AMG Data Services reported Thursday night that for the week ended Wednesday, October 31, $1.8 billion flowed OUT of equity funds. But over half of that was from non-domestic funds. Still, this just focuses more suspicion on the sustainability of the recent rally. One-third of the outflows were from large-cap growth and value funds. A bright spot was that small-cap and aggressive growth funds reported inflows. $1.6 billion flowed into taxable bond funds. $10.8 billion flowed OUT of money market funds. But tax-empty money market funds reported inflows. Municipal bond funds reported the largest inflows since October 3rd. Another distinct possibility is that an increasing number of individual investors are buying stocks, but not mutual funds. That would be consistent with the outflows from money market funds. And also consistent with the idea that it's the aggressive individual investors who may be stoking this rally and they're the kind of people who pick stocks themselves rather than use mutual funds. The mindless dumping of cash into the hands of mutual fund managers will come later. Another possibility is that mutual fund investors are shuffling their money between different funds and that's causing some of the whipsaw action.
I love this quote from an economist: "The only certainty is uncertainty and ambiguity." That says it all. Any questions about yesterday's economic reports? Lets evaluate today's employment report using that model.
The status hearing in the Microsoft (MSFT) antitrust case is today. If there is a settlement, we'll hear the details. If no settlement was acceptable to the states, we'll hear about that too. There's a possibility that the parties are close but not quite there and will have to ask the judge for more time. It's also possible that DOJ will settle without the states. Whatever, it will be very interesting. The hearing starts at 9:00 a.m. and probably will last less than an hour. I'll be there. Please note that any settlement will not eliminate the potential for private antitrust lawsuits that make use of the findings of this case. In any case, settlement will be good news. But it may already be fully priced in the stock and we could see some profit taking. An alternative is that shorts will believe what I just said and short the stock. But the bulls will see this and then initiate a short squeeze since there probably aren't enough bears around to counter the bulls. That will be fun to watch as well.
The "war" is going about as well as could be expected. It may seem confusing, but there are a lot of people doing a lot of things than need to get done. War is messy. Lots of loose ends. Not everything happens in a nice, orderly, well-behaved manner. Are you anxious about it? Good. Just deal with it and move on with your own life. When it's over we'll be able to make sense of it. Face it, some people are just not be cut out to watch a war in progress.
Credible threats? Sure. Until we get a real handle on this terrorism mess (wait six months), we might as well assume that attacks could come at any time. The "alerts" should be considered mostly to assure that "the authorities" are at peak readiness. There truly is nothing that any of us average citizens should be doing other than being reasonably vigilant and going about our normal lives. It's the sane thing to do. If necessary, turn off your TV and don't read the papers. Whatever it is that you need to do to personally cope, do it.
It's Friday, before a weekend, during a war, so expect short-term traders to close out positions in case unexpected events happen on the weekend. But my suspicion is that the optimists and cynics are in rough balance, so they just each undo each other's handiwork and cause no net change. Basically, NOBODY truly believes they market is destined to go strongly up or down in the short-term. It's kind of a stalemate, for right now. Although I do think the bias is for a gradual, if erratic, rise for a while longer.
Jack Krupansky
Updated: November 01, 2001 11:42:20 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology