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Nasdaq continues to confound the "experts", rallying when it should be correcting. What could possibly be the reason for the latest rise? Maybe it's some kind of "Harry Potter" spell. Whatever. Ride it while it lasts.
The cynics tried their darnedest to push the market down after a strong rally on the open. Nasdaq rose sharply to above 1930 a few minutes after 10:00 a.m., but only for a few minutes, before the profit-takers and short-sellers took control of the market and sent it back down to the 1905 level by 1:30 p.m. Just before 2:00 p.m., the shorts started bailing out (buying). They made a another attempt at 2:30 p.m., but by 2:45 p.m. Nasdaq began a steep rally right into the close. This was a rather messy affair. The close was only 3 points higher than the level at 10:05 a.m. There just aren't enough buyers to make it worthwhile to have the market open all day.
I would have liked to have seen a cleaner, steadier rise (what I call an escalator), but the dynamics of the current situation are such that many cynics feel the rally is way overdone and they continue to make every possible attempt to send the market lower. Unfortunately, for them, there is just enough buying to keep a tone of optimism in the air.
The market may have been boosted by comments about sales from a PeopleSoft (PSFT) executive who said they were seeing "one of the strongest pipelines in the company's history". That's a very positive sign. Now we wait for other companies to start making similar noises.
Nasdaq has now closed above its 100-day moving average for SIX days straight. And, the 50-day moving average has turned up a little bit further. Another 50-60 points and we bump into the 200-day moving average. The 100-day moving average still hasn't quite bottomed or turned up.
The New Residential Construction (Housing Starts) report for October showed a decline, but not by that much more than could have been expected. I'd rate this a slightly negative report, but coming off of recent events, we should be ecstatic that it wasn't much worse.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 5.34% on Monday to 25.72, which is near the bottom of the moderately high anxiety zone (25 to 30). VIX ratcheted down on the opening rally but stayed in a range from 10:15 a.m. til 2:00 p.m. as the rally stalled and fell back. But by 2:15 p.m. VIX resumed its fall into the close. People are definitely feeling a lot more optimistic about everything. Cynics may read this optimism as complacency and try even harder to "discipline" the market. We'll see. The market really is due for a breather, but when optimism takes root it's hard to hold it back.
The Nasdaq-100 After Hours Indicator was even stronger in the Monday evening session than on Friday, closing up 6.71 points. There were a couple of weak moments of profit-taking, but the thing just kept snapping back. This is the good old optimism that we used to love so much.
Fed Funds Futures suggest a 40% (up from 31%) chance of a quarter-point cut in interest rates at the December FOMC meeting. The bond market continues to believe that the economy is on the verge of a recovery and that no additional monetary stimulus is needed.
On Monday I made my latest dollar-cost averaging (DCA) purchase of January 2004 S&P 500 Tech Sector "Spider" (XLK) LEAP call options. I do feel just a little silly buying at these "nosebleed" levels, but for a DCA plan to work you must remain disciplined.
Is this rally going to break down or not? It still could, at any time. But there are too many positive forces at play for the current optimistic tone to be any more than temporarily suppressed. Who knows, maybe the hedge funds and institutional investors have decided that there's more money for them to make in a bull market than a bear market. Especially when that bear market no longer exists.
The bottom line: The Fall rally (41 days old) is intact and as strong as ever. A modest dip (say, 5%) is to be expected, but any significant dip should be bought.
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.
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.
Jack Krupansky
Updated: November 19, 2001 11:27:15 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology