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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.
Okay, so we had a nice rally on Monday. But can we get some follow-through? Cisco's (CSCO) quarterly report might provide the catalyst for such follow-through. We'll see.
The National Association of Purchasing Managers (NAPM) Non-Manufacturing Business Activity Index plummeted to 40.6% in October from 50.2% in September. This was a very negative report, but once again, many people knew it would be bad and simply had no way to realistically estimate how bad. The market hardly even reacted to the report, just a couple of points down and then up ten points a few minutes later. I fully expect that the November report will show a significant improvement. Try to recall how crazy life was a month ago. Executives simply had no clue how to forecast their business and neither did their venders or customers. The result was an incredible excess of caution. That caution will continue somewhat for a while, but diminish as every day goes by.
The Chicago Fed National Activity Index for September still indicates that the economy is weak and likely in recession. This was a very negative report, but not surprising and somewhat ancient history as well.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 1.42% on Monday to 31.94, which is still up there in the high anxiety zone (30 to 35). Although this is only a slight improvement in the face of a nice Nasdaq rally, VIX had dropped a lot on Friday already. VIX bounced around a lot on Monday, much more than Nasdaq itself. Basically, people are still very confused as to what to think of the economy, the "war", and the stock market's recent behavior. VIX says we've got quite a ways to go to get to a state that might be called normal.
The Nasdaq-100 After Hours Indicator took off in the Friday evening session as Cisco (CSCO) reported better than expected results, closing up 18.08 points. We've seen big after-hours gains several times over the past month, but each time the rally petered out very quickly. Maybe this time will be different.
Cisco (CSCO) did have some positive things to say, but management admitted that visibility in the coming quarter would be worse than the last quarter. So, unfortunately I can't give them a solid, positive score in my tech stock "safe" index. Maybe next quarter they'll be safe, but right now they're still shaky.
Fed Funds Futures continue to suggest a 100% chance of a quarter-point cut in interest rates at the FOMC meeting today as well as close to a 100% chance of a quarter-point cut at the December meeting. There is still only a little more than a 50% chance of a half-point cut at the meeting today, so I'd say it's not likely. That kind of almost even split means there's no clear choice for the FOMC members. Part of me thinks they'll opt to give a larger cut to aid the flagging economy. I'd be more comfortable with a half-point cut and the market could be rather disappointed if we don't get it.
The showdown at the Microsoft (MSFT) antitrust corral over the proposed settlement is on at 9:00 a.m. today. I'll be there. Several of the states have been expressing strong reservations over the past few days, so getting them all on board may be like herding cats. If they don't produce an agreement with Microsoft, then the trial continues for the state half of the case and the DOJ half proceeds on a process for what is called a Tunney Act proceeding. I would not hold out high hopes for the states to acquiesce, but anything is possible.
I made my usual weekly dollar-cost averaging (DCA) purchase on Monday. I did stick with the January 2004 LEAPS for the S&P 500 Tech Sector "Spider" (XLK). The weakness of the market on Friday helped to keep the volatility premium down.
How much more life does the October rally have? Very difficult to say. It's critically dependent on more and more people coming around to the idea that the economy will be growing again by April or May. Hey, I'm a believer, are you? But don't just believe because I told you to. Believe if and only if your own gut feel for the parts of the economy that you and your friends, family, co-workers, clients, and customers personally come in contact with suggests a fairly improved economic outlook in six months. Don't try to be an economist with a mathematical model, just look around you and follow your own nose.
Jack Krupansky
Updated: November 05, 2001 11:53:46 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology