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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. Some indicators will continue to decline, even as others begin to stabilize and some even begin rising. 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.
Friday was more of a technical trader's market. The 1730 support level held after being tested in the morning and numerous attempts to break the 1750 resistance level could not be sustained. All of this just means there was no real buying or real selling, just traders pushing the market around based on their crazy charts. After two days of rallying, nobody can complain if Nasdaq merely treads water for a while.
Some people might have been disappointed that Nasdaq didn't rally on the Microsoft (MSFT) settlement news. Most likely this was just a case of the traditional "Buy on rumor, sell on news" approach that Wall Street likes so much. The rally on Thursday was more than enough.
It looked like there was a little profit-taking in the early morning, but at 11:00 a.m. it sure looked like some real buyers showed up to buy the dip. The net change for the day was almost flat, so there might have been a little changing of the guard as people who had made money in the October rally took a little money off the table even as sidelined players (who stayed out of the October rally) decided to put a little money on the table. I view this as a good sign, a broadening of participation in the market. People willing to take a shot and see what happens.
The Employment Situation report for October was, of course, truly horrendous. This was a very negative report and even worse than many expected. But it was not so much worse than the weekly jobless claims reports had been suggesting for the past month. The market responded fairly well, indicating that stock prices had reasonably discounted an anticipation of a bad report. The Nasdaq Pre-Market Indicator (PMI) started at 8:15 a.m. with a negative tone and declined into the 8:30 release of the report. But by 8:37, the PMI reversed and recovered half of its loss by the opening bell at 9:30 a.m. This was a very clear indication that the market was willing to look beyond the employment report. And Nasdaq closed roughly flat, so, all in all, that wasn't too bad. I expect the November report to show another increase in unemployment, but not so dramatic a jump as this 0.5% jump from 4.9% in September to 5.4% in October.
The Factory Orders report for September showed a significant decline. This was a very negative report, but about as expected and somewhat ancient history. One bright spot was that semiconductor orders rose for the second consecutive month.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) showed a slight improvement for the week ended October 26. The previous week had show a smaller drop from the week before that, so it's almost as if this indicator is beginning to stabilize. But it's too soon to tell for sure. Still, at least this was not a negative report.
The Semiconductor Billings report for September showed a 2.5% decline from August, the smallest decline since last December. This is a slightly negative report, but welcome since it suggests a possible stabilization.
The Vehicle Sales report for October surged and showed the best one-month pace on record. This was a very positive report, despite the fact that it was due in large part to zero-percent financing. Sales can be expected to decline as the financing incentives end. Or maybe they won't. Businesses can get very creative when they put their minds to it. And I wouldn't count out those crazy "shop 'til you drop" consumers just yet.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 5.21% on Friday to 32.40, which is down in the middle of the high anxiety zone (30 to 35). This is a nice improvement and came despite a very modest day in the market with Nasdaq flat and the Dow up just slightly. People may have taken comfort in the fact that the market didn't show a significant decline or major profit-taking after Thursday's rally and the lousy employment report. In any case, VIX is still at an elevated level due to both the terrorism threat and the weakness of the economy. VIX rose after the open due to the anxiety-provoking employment report and stayed up near 34.5 until 11:00 a.m. when Nasdaq started to recover strongly. VIX had broken even by 11:30 a.m. and continued on a steady downtrend until about 1:30 p.m. when it became clear that the Nasdaq rally had petered out. VIX then rose a little and stayed in a trading range until about 3:30 p.m. and then fell into the close as it became clear that there was no major selling pressure.
The Nasdaq-100 After Hours Indicator was somewhat erratic in the Friday evening session, but did take on a slightly positive bias, closing up 0.79 points. No strong optimism, but no strong cynicism either. About as even-keeled as you could get, just like the trading during the day.
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 once again a little more than a 50% chance of a half-point cut at the November meeting, but I'd say it's not likely.
In a poll on Friday, 15 of the 24 primary dealers in treasuries (that's 63% of them) were predicting a half-point cut in interest rates on Tuesday. The other 9 are predicting a quarter-point cut. There are arguments both ways. Usually the dealers have a good feel for which way the Fed will go. If the split was at least 75% in favor of the half-point cut, then I would say it was a done deal, but it isn't. This latest poll suggests that it isn't clear which way the Fed should go. Might as well flip a coin. In addition, 21 of 24 dealers expect another rate cut in December, most likely a quarter point.
I am thinking a little more intensely about the employment situation. Even if, as I strongly suspect, the pace of layoffs begins to stabilize over the coming month, the absolute number of people out of work will continue to grow. In fact, it's very possible that the pace net layoffs won't decline to zero before Spring. That does not mean the recovery won't start until Spring. It's typical that unemployment continues to rise during the initial phases of any recovery. Only when the recovery has moved beyond the nascent stage and the rate of growth of production is finally greater than the rate of growth of productivity will we see employment actually start to rise again. While it's not good for the economy in the short run when people lose their jobs, it does help companies adjust and tune their business models so that their businesses can begin growing both revenues and earnings again. Only when business managers feel like growth is just around the corner can they begin re-hiring workers in large numbers. I still feel that Q2 of 2002 will see a return of a decent rate of growth. But we also should be prepared to be looking at a relatively weak economy over the next few months. On the employment front, unemployed workers may decide to just live on savings, credit cards, and home equity loans until the economy picks up again. That's not the preferred outcome, but it'll work.
Oil prices are way down. This is very good news for everybody except the oil guys. Fuel prices are effectively a tax on the economy. Lower fuel prices are like a tax cut. OPEC may seek to cut production, but with a weak global economy, it's unlikely they'll be very successful since even with an official cut, it's likely that members will cheat to try to get some extra income. And Russia and Mexico would probably more than make up for any shortfall. In any case, the lower oil prices should be considered part of the stimulus for our weak economy.
Well, we now have a formal Microsoft (MSFT) antitrust settlement proposal in front of us. Unfortunately, the states in the case still need time to review it. They have until Tuesday morning to make up their minds. A hearing is scheduled for 9:00 a.m. to hear what they have to say. Although there does seem to be deep disappointment on the part of the states that the proposal is not enough, after a little soul-searching they might actually join in. They can claim victory and have achieved much of their original aims. The details of the proposal were not finalized until the last minute, so it's perfectly sensible for them to take a couple of days to look for loopholes and to become comfortable with it. The judge seemed quite content to grant this extension. The judge also indicated that she was fully prepared to go forward with both the settlement on the DOJ side and further litigation of the states side if that was necessary. That should be read as a subtle threat that failure to settle would not help the government's case. My reading: enough already, just do the deal, everybody can claim victory, and move on. But then there's Sun (SUNW) and AOL (AOL) who basically think the deal stinks, but I don't see how the terms of the consent decree will change the competitive landscape significantly enough to have a severe negative impact on these players. The whole lawsuit was a "hail mary" by Sun to try to deter Microsoft from poaching in the server market.
The unfolding drama at Enron (ENE) is rather captivating. Some have likened them and their financing and leveraging problems to the mega-meltdown of the Long-Term Capital Management (LTCM) hedge fund, with the possible need for a bailout since so many companies now depend on them for trading various goods and services. They could go bankrupt, get taken over, sell assets, or maybe even recover. Buying their stock is a very risky proposition, but it does have some appeal. Be careful.
It's Monday again, so it's time for me to make my weekly dollar-cost averaging (DCA) purchase. It almost sounds kind of boring. Well, that's because it's designed to be that way, to eliminate anxiety. I'm still buying S&P 500 Tech Sector "Spider" (XLK) LEAP call options. I'll go with the 2004 LEAPS if the premium is still cheap, otherwise I'll fall back to the cheaper 2003 LEAPS.
Has the October rally petered out and is it now likely to begin retracing due to the truly abysmal prospects for Q4? Possibly, but if the market does pull back it will likely be very temporary. It's all a matter of the perspective of the market participants. Sure, the short term "bad apples" are truly ugly. None of the top tech companies is telling us how wonderful Q4 will be. But, the longer-term "sunny oranges" seem awfully tempting, especially for those of us who have spent the past twenty months "crossing the desert". If you're thirsty and someone says "Look, Water!", do you say "Where?" or "I don't believe you"? The tug of war between the short-term cynics and the long-term optimists will continue for at least a couple more months. Yes, some of the people who got into the rally early will start taking their profits. But, lots of bears will be painfully closing out shorts. And, incrementally over time, more and more sidelined players will begin venturing deeper into the water. But none of this is to say we couldn't have some more dramatic pullbacks like we've already seen several times in the October rally. In fact, it's not out of the question to have a 200-point pullback and still see the rally intact. Bad news in the "war" or anxiety over new attacks can cause a lot of damage to the rally, but as the old saying goes, "That which does not kill us makes us stronger".
Anthrax, the "war", possible new attacks, and the weak state of the economy MAY continue to weigh on the market. But, who knows. People are gradually getting somewhat desensitized to all this stuff. As long as we can sense at least a little progress, we'll be okay. There will be occasional relapses, but they're par for this kind of course. Keep the faith.
Whether the New York traders will be in a grumpy world about the Yankees losing the World Series is another story. Maybe they'll get over it. Maybe. Maybe not.
Jack Krupansky
Updated: November 04, 2001 11:26:09 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology