| 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. 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.
Very impressive. Nasdaq showed truly amazing resilience on Monday. On a day when an "overbought" Nasdaq was due for a sell-off, combined with a plane crash that could have been due to an act of terrorism, Nasdaq had the potential for a massive meltdown. Instead, we actually saw a modest gain that enabled Nasdaq to close above its 100-day moving average for the first time since early August. Unbelievable. What next?
The incredible progress of the Northern Alliance in Afghanistan way have helped the market hang in there. We still have a long way to go in the fight against terrorism, but the progress is quite impressive and likely to stand.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE by 8.69% on Friday to 31.26, which is once again back up in the high anxiety zone (30 to 35). VIX leaped up to 33 on the open as a result of the plane crash and stayed in a fairly narrow range between 32 and 33 until about 12:20 p.m. when it fell off to the day low of 30.92 at about 1:15 p.m. and then stayed fairly stable through the close. The mysterious plane crash just before the opening of the market has people very anxious. Even the incredible progress in Afghanistan didn't soothe nerves. Unless the plane crash is clearly attributed to terrorists or another similar crash or other act of terrorism occurs, I'd expect VIX to fall off fairly quickly over the next few days. Right now, although the authorities are saying they have no evidence that the crash was an act of terrorism, people are more inclined to believe that if it looks and sounds and smells like terrorism, that it's safer to assume it was terrorism.
The Nasdaq-100 After Hours Indicator had a mostly positive bias in the Monday evening session and closed up 0.77 points. Once again, we see a fairly even-keel performance. People don't seem too willing to bet on a big rise, but they're not betting on a major sell-off either.
Some major quarterly reports are coming up this week: BEA Systems (BEAS) and Sycamore Networks (SCMR) today. Applied Materials (AMAT) on Wednesday. Agilent (A), Dell (DELL), HP (HWP), Intuit (INTU), and Wind River Systems (WIND) on Thursday. Nobody is expecting any great news, but there could be some relief rallying just to get these reports out of the way. The only possible real upside news would be if management can report seeing an improvement of business at the end of October.
The bond market was closed due to the Veterans Day holiday, but as of Friday, Fed Funds Futures suggest an 80% chance of a quarter-point cut in interest rates at the December FOMC meeting and NO cuts after that.
The anxiety over the plane crash let me get a really good price on my weekly dollar-cost averaging (DCA) purchase of January 2004 LEAP options for the S&P 500 Tech Sector "Spiders" (XLK). I bought them just a few minutes after the open.
Since the market seemed to have once again sold off in a knee-jerk reactionary mode, I picked up some extra January 2003 LEAP call options on the Nasdaq-100 Index Tracking Stock "Qubes" (QQQ) before 10:00 a.m. In fact, I could have sold them for a profit at the end of the day despite the wide spread.
The Fall rally continues. Traders, cynics, and technical analysts will try to sell it off since Nasdaq is considered overbought and stocks overvalued. Those inclined to take profits have had numerous chances over the past week and Nasdaq is still hanging in there. If this keeps up much longer, sidelined money is going to start thinking that the market is safe again.
I'm not making any absolute bet that the rally will continue. But I certainly am not going to bet that it will fall apart either. I'm in a one-day-at-a-time mode. Watching everything very closely. I would say that there's a 70% chance that the rally will continue without more than a 10% dip and a 30% chance that we will see a major pullback. But in either case, I expect the rally to continue after we get past the current technical congestion.
Traders will do their duty and test Nasdaq to see if it really is ready to hold its head above its 100-day moving average. A little extra selling or buying will make all the difference as to whether Nasdaq can maintain a strong position. Ditto for bad news about the plane crash or a little extra exuberance about the progress in Afghanistan.
The encouraging sign in Afghanistan that explains why progress is so rapid all of a sudden is that a number of Taliban commanders are switching sides or just walking away from their commands. The Pentagon had been pointing out the possibility of this kind of behavior numerous times over the past month. Now it has finally happened. It's rather breathtaking. Taliban forces may be regrouping in southern Afghanistan to carry on a guerilla war, but I think their days are numbered. Even without deploying large numbers of ground troops, we have too diverse a set of weapons for them to survive. The best they can do is hide in the mountains or caves, but they're going to have to come out to do anything and then they can be detected and "targeted". They just don't have much of a chance.
So what really happened to the plane to make it crash? Was it an accident or not? Unfortunately, it could take a very long time to know for sure, and it's very possible that we will not be able to determine the true cause with any certainty. It might end up like TWA Flight 800, where at best all they were able to come up with was a strong hypothesis. Fortunately, most of the pieces are more accessible than Flight 800. They should be able to examine them to determine if there is evidence of an explosion and what type of explosion it was. I am concerned that such a catastrophic breakup could occur in mid-air as merely an "accident" or as the result of a "catastrophic engine event", so I'm fully prepared to accept that the explosion may have been intentional. But I'm also fully prepared to wait for more conclusive information. In any case, all we can do is sit back and be calm and patient and let the investigators go their thing. There's never anything as useful as letting the dust settle before drawing conclusions.
Jack Krupansky
Updated: November 12, 2001 10:57:27 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology