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Finally, we get a whiff of a correction. So, that's what it's like. It's been so long. There's no real reason to point to for the drop other than that it was long overdue. There was some mention of a little more anthrax and the "war" isn't moving as fast as a few days ago. And CSFB downplayed the chip sector a little. But there was simply nothing to point to that should cause investors to question the six-month outlook.
Maybe the market was expressing disappointment that the President was canceling holiday tours of the White House. There are too many Grinches running around this year.
Tuesday started out as a simple tug-of-war with traders jostling the market in a narrow range. Around 10:45, some serious selling seemed to materialize. The market struggled to recover a little and maybe there was some dip buying that helped to steady the market. But by 2:30 p.m. it was clear that the selling was not going to let up. This was a classic "throw in the towel" day. The selling was too strong for anybody to fight it. Sidelined money stayed out and many participants decided that maybe it was a good time to take some more money off the table. Whether the selling is done or this is just the beginning, is anybody's guess. Today and Friday will be thin trading days, so we may have to wait til Monday to get some serious confirmation of the trend.
Despite Tuesday's decline, Nasdaq has now closed above its 100-day moving average for SEVEN days straight. And, the 50-day moving average has turned up a little bit further. But, yesterday's fall moves us a bit further from bumping into the 200-day moving average.
The Conference Board's Leading Economic Indicators (LEI) index rose in October. This was a positive report. And it's also for last month, so improvements over the past few weeks haven't worked themselves into the index.
The International Trade report for September showed the trade deficit shrinking dramatically as a result of the effects of the 9-11 events. But the situation is confused due to the payment of massive insurance claims by foreign insurance companies. Still, I'd rate this report a slight negative, primarily because exports are down.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE by a slight 1.13% on Tuesday to 25.93, which is still near the bottom of the moderately high anxiety zone (25 to 30). VIX jumped on the open and then began to decline. But at 11:00 a.m. it spiked back up before beginning a longer decline. Then at 2:00 p.m. VIX began a climb into the close as Nasdaq continued to deteriorate. People responded fairly well to Tuesday's Nasdaq decline. A correction was long overdue anyway. People didn't panic. What remains to be seen is whether the decline was simply part of a pre-holiday bout of profit-taking, or something more ominous. For now, there's still nothing to worry about. On the other hand, some traders consider the relatively low level of VIX as a sign of excessive complacency and a good reason to push on the market to take it down further. Whether they will succeed is another matter. Some smart investors may have also used the level of VIX as a guide for when to sell.
The Nasdaq-100 After Hours Indicator bounced around in a somewhat confused manner during the Tuesday evening session, but did manage to close up a slight 0.2 points. People were confused by the day's trading action and simply unsure if the dip was over or just beginning. But, in the end, people decided not to worry.
Analog Devices (ADI) warned of a big drop in expected revenues for the coming quarter. That's not good news, but they did indicate that this coming quarter might finally be the long-awaited trough.
There was a preliminary report of an elderly woman in rural Connecticut with a suspected case of inhalation anthrax. This shouldn't be enough to cause the market great alarm anymore, but it could be an excuse for the cynics who wish to pursue a sell-off. Ditto for the ongoing testing of the Leahy letter and Senate office buildings.
After the close: The ABC News/Money Magazine Consumer Comfort Index edged down to -5 from -4 last week (on a scale from -100 to +100). I'd rate this a neutral report. Consumer opinion about the economy ticked down slightly, but their opinion about buying conditions and their personal finances were unchanged. The recovery is not going to be a straight-up affair, but rather will have little relapses on occasion. And consumers are notorious for letting the media guide them in how they view the overall economy.
After the close: The SEMI book-to-bill ratio for chip equipment rose to 0.71 in October from 0.64 in September. Actual shipments (billings) continue to decline, but orders (bookings) rose. This was a slightly positive report. I'm confident that the November report will be even better. The chip sector isn't out of the woods yet, but definite progress is being made. Note that this report was for companies that make the equipment for producing chips, not the companies that actually produce chips themselves.
Fed Funds Futures suggest a 44% (up from 40%) 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. Still, over the past week there has been a noticeable deterioration of optimism. But, I'd say most of that was simply confusion rather than a certainty of less optimism.
The New York Stock Exchange reports that margin debt at member firms fell by a very slight $50 million (0.03%) to $144.62 billion from $144.67 billion in September. Free credit balances in margin accounts fell by $13.3 billion (11.5%) to $102.15 billion from $115.45 billion in September. A good chunk of that cash went to buy stocks. The really good news is that customers did not run up their margin debt to buy stock.
Microsoft (MSFT) decided to settle a massive class-action lawsuit that alleged that the company overcharged consumers for software. The settlement really ends up being a big marketing promotion for Microsoft by ensuring that thousands of schools will use Microsoft products. There will be accounting charges for the cost of the settlement, but Wall Street likes to ignore them anyway. Eliminating the threat of this massive conglomeration of class action suits removes yet another cloud that has been hanging over the company. In any case, this latest development is neither a significant positive nor negative compared to the really important issues related to the overall economy, corporate IT spending, and the health of the PC sector.
I picked up some PMC-Siera (PMCS) and Broadcom (BRCM) late in the day when it seemed like the sell-off was being overdone. I focused on chip companies because they seemed to be the sell-off "target" du jour. I also picked up some more Nasdaq-100 Index Tracking Stock "Qubes" (QQQ) LEAP call options. I don't have any reason to believe that the Nasdaq correction is over, but I'm just going to keep buying any and all dips.
It may seem that the "war" is starting to get bogged down, but don't worry about it. Just two weeks ago people felt the same way and then there was lightning progress. That's just the way wars go. Yes, there are all sorts of issues to be resolved, but that's par for the course. War is chaos. If it ever seems to be less than completely chaotic, that's an illusion. In any case, things are going quite well. If you don't have the stomach to deal with all the anxiety, then simply don't watch. As a citizen, you have an obligation to act in a responsible manner. Hand-wringing and whining are not responsible. Deal with it.
Today (Wednesday) is going to be a rather slow and volatile day. Some people will try to push the correction a bit further. Others will be buying the dip. Traders will help the market follow the path of least resistance. The likely scenario is a slight recovery of some of Tuesday's losses. Still, any kind of bad news (anthrax?) is likely to exacerbate the correction.
The bottom line: The Fall rally (42 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 21, 2001 12:06:57 AM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology