| 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.
Quite an impressive performance by Nasdaq on Tuesday. People were more willing to believe that the plane crash was a fluke accident (I'm not totally convinced though). The progress in Afghanistan was nothing short of amazing. And, the much-ballyhooed and overdue correction just didn't happen, yet.
But the rally wasn't completely clean. Some confusing comments from Cisco (CSCO) may have lead to an attempt to sell off the market. Whatever it was, the rally unfortunately was not a flawless performance and Nasdaq may have tried to move a little too far a little too fast. I'm a little worried, but I'll take the gain no matter how untidy it was.
Nasdaq closed above its 100-day moving average for the second day in a row and by a significant margin yesterday. Not only did it close above the average, it also opened and stayed well above the average all day. They call that a breakout. The 100-day moving average almost looks like it may be bottoming and possibly even about to turn up. That's a very encouraging sign. Now we're back to the longstanding issue of follow-through. Still, it's not unusual for a nascent bull market to be a very rough affair with lots of fits and relapses before it eventually is officially declared a bull market. Maybe by mid-December we'll start to see cover stories touting that "The Bull is Back". Not quite yet, though.
On top of all that, Nasdaq's 50-day moving average finally turned up. It hasn't done that since the late May peak of the Nasdaq April/May rally. Some people will draw parallels to the April/May rally running out of steam. Whether the rally can continue is dependent on whether additional money continues to flow into the market. Encouraging signs in the economy and progress in the "war", and slim returns in anything other than stocks would seem to suggest that there's a very good chance that the market will pull in funds even if there is a correction of sorts before the rally continues.
Nasdaq rallied despite a warning from Oracle (ORCL). Oracle's quarterly reporting cycle is shifted differently than most companies. Their latest quarter ends in November, covering September, October, and November. Other companies had August and possibly July to help them deal with the events in September. Oracle's quarter does not include August, October was bad, and November is a big unknown. Oracle is doing the right thing by being conservative about November. If the stock gets hit much more, I'll be a buyer.
The Kansas City Fed Manufacturing Survey for October showed a slight improvement in production, but otherwise showed a further deterioration in the manufacturing sector. This was a negative report, but nobody was expecting the manufacturing sector to turn up quite yet.
The Richmond Fed Manufacturing Survey for October also showed significant weakness in the manufacturing sector. This was a negative report. The bright spot was that the six-month outlook is still positive.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 8.41% on Tuesday to 28.63, which is once again back down in the moderately high anxiety zone (25 to 30). I thought it would take a couple of days to recover from Monday's rise in anxiety, but I was wrong. It took only one day to put us back down where we left off on Friday. VIX is now at the anxiety level of September 5. VIX fell dramatically on the open and by 10:15 a.m. was under 30, the boundary between the high anxiety and moderately high anxiety zones. VIX declined further, to a day low of 28.51 at 1:15 p.m. Some significant profit-taking, especially on the Nasdaq, sent VIX back up to over 29.5 from 2:00 to 3:00 p.m. But then VIX fell back into the close as Nasdaq staged a strong recovery. This was a great performance by VIX, but it was all so sudden and so dramatic that I'd be wary of it all sticking. Still, there's a good chance that it will mostly stick.
The Nasdaq-100 After Hours Indicator had a solidly negative bias for the entire Tuesday evening session and closed down 1.74 points. No real news here, just people taking a little money off the table after a strong rally that seemed a little bit overdone.
Quarterly reports from BEA Systems (BEAS) and Sycamore Networks (SCMR) were not positive enough to excite the market, but the big rally during the day more than compensated for any lack of enthusiasm in the after-hours market.
Applied Materials (AMAT) and HP (HWP) will give us their quarterly reports today.
After the close: The ABC News/Money Magazine Consumer Comfort Index for the week rose to -4 from -5 last week. This was a positive report. The only negative aspect of the report was that slightly more people think the economy is deteriorating. Countering that, slightly more people feel positive about their own personal finances.
Fed Funds Futures suggest an 70% (down from 80%) chance of a quarter-point cut in interest rates at the December FOMC meeting and NO cuts after that. Bond market economists are increasingly more optimistic about 2002.
As safe as bond funds seem (and are), their days of safety may be numbered as Fed interest rates approach a bottom. New money in bond funds simply isn't going to earn much money and will have little chance of capital appreciation compared to the past year. In fact, bond funds run the risk of a loss if interest rates begin to rise in 2002. As bond investors (and managers) get anxious about the rate of return, they will be very tempted to start "chasing yield", moving from safer, low yielding debt to riskier, higher yielding debt or even junk bonds or emerging market debt. It is inevitable that over the next six months many money managers will simply throw up their hands and shift increasing amounts of money to quality stocks rather than risky debt. When and at what pace this shift in asset allocation occurs is a great unknown, but it's inevitability is certain. Some managers are very skilled with riskier debt, but others don't have a chance. Know the limits of your own investment skills, but know the limits of your fund manager's skills equally well. It was a no-brainer for even a mediocre bond fund manager to win big over the past year, but the coming year will surely weed out the geniuses from the mere mortals. Be careful.
Don't let the recent dramatic successes in Afghanistan fool you into believing that the "war" is virtually over. We still have a VERY LONG WAY to go. Still, progress is progress. I'm personally very enthusiastic about the progress. The market is right to stop being so gloomy. Let's just hope that the market doesn't set itself up for a gigantic disappointment by factoring in too much irrational exuberance.
It's still too early to draw any strong conclusion as to whether Monday's plane crash was a freak accident or an act of terrorism. The official "view" is that it was an accident, but the reports of details are still fragmentary and frequently conflicting. We know for certain that OPINION favors a mechanical failure, we just don't know enough of the facts to know what the facts will say. It's great that we all have so quickly gotten over obsessing over it as a possible terrorist attack, but we still need to be open-minded until the investigators have completed their jobs. It will be great if it wasn't an act of terrorism, but so far it still seems like there is plenty of cause to believe that there is a non-zero chance that it was not an accident.
President Bush decided to expand the Strategic Petroleum Reserve (SPR). This is a good idea, to buy oil when it is relatively cheaper. The timing is curious. My suspicion is that the administration is worried that Iraq will turn off its oil spigot at any time. Iraq exports over a million barrels of oil a day. If the U.S. decides to go after Iraq, that would, by default, shut off that oil flow until the Iraqi situation is resolved. In the Gulf War, Iraq sabotaged the Kuwaiti oil fields and set them on fire. What Iraq might do if attacked by the U.S. is anybody's guess, but the flow of Iraqi oil would certainly be endangered. The administration is still split as to whether the U.S. should intervene in Iraq and oust Iraqi President Saddam Hussein. A big risk is that if Hussein feels that his survival is threatened, he will go after Israel with his remaining Scud missiles, armed with chemical and biological weapons. But, it's not likely that any major assault on Iraq would occur until after Afghanistan is brought under control.
It's still an open question whether Nasdaq is due for a significant correction. The real point is that unless additional buyers enter the market to keep momentum up, momentum traders will start taking money off the table, which means the market will fall. So, the direction of the market is critically dependent on the behavior of sidelined money. Also, if Nasdaq can keep moving ahead of its 100-day moving average for at least another week, traders will begin to say that the breakout is real.
My feeling is that yesterday's rise was a little bit overdone, so it wouldn't surprise me if there was a little profit-taking. On the other hand, momentum can feed on itself and drive the rally even higher before profit-taking occurs. Also, the cynics are itching to short this market, but every time they do, it just causes yet another bout of short covering. The underlying trend is now quite bullish.
Jack Krupansky
Updated: November 13, 2001 10:42:42 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology