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[Make sure to read my Friday column as well if you were out for the long weekend]
Last week was a holiday week, so it's almost not worth trying to make any sense out of it. There was a little bit of correction combined with some rallying, but combine that with many market participants being out for the holiday and you have an inconclusive market. It could take several days for the market to find its feet again.
Friday's market action was almost a nice upwards escalator. It was still a bit bumpy with numerous attempts to take it back down, but there was very clear buying. But that was only half a day. Maybe that's the thing, we have buyers, but only enough for a half day of business. The question is when we will see enough buyers to fill an entire trading day for days on end. Maybe not until my tech stock "safe" index indicates that the fundamentals of the tech sector really are on the rise.
Nasdaq has now closed above its 100-day moving average for NINE days straight. And, the 50-day moving average has turned up a little bit further. Nasdaq might run into trouble again when it once more bumps into its 150-day moving average which is about 40 points above the current level. After that Nasdaq will have to struggle through the 200-day moving average about 70 points above the current level. Then, there's the big 2000 which is a mere 96.80 points above us. It won't be hard to break through these levels as long as some new money begins to flow into the market. But without new money, profit-takers and short-term traders will try to hold us back.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 2.13% on Friday to 24.78, which near the top of the moderate anxiety zone (20 to 25). VIX hasn't been this low since late August. VIX trended down nicely for the entire Friday session. People were not expressing very much anxiety. Maybe it was optimism about the holiday shopping season. But, once again, we can't depend on the results from a holiday week. We need to wait til the Wednesday close to get a good feel for where the market is really at.
The Nasdaq-100 After Hours Indicator spent the Friday evening session with a mixed to negative bias, closing down 0.19 points after a good rally during the day. Just a little profit-taking. But none of this holiday-week trading really means very much.
AMG Data Services reported Tuesday evening that for the 4-day week ended Tuesday, November 20, $2.1 billion flowed into equity funds. That's fairly impressive. And that was for less than a full week. Only $322 million flowed INTO taxable bond funds, and mostly to junk bond funds. $21.6 billion flowed INTO money market funds. Huge amounts of money out there.
Fed Funds Futures suggest a 40% (down from 44%) 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.
One of the biggest uncertainties, is not the overall economy or the stock market, but the timing and extent of a rebound in tech spending by businesses. It really has not happened yet and tech can't go anywhere without it. My feeling is that there is now a lot of pent-up demand for technology and the stabilization and initial recovery of the rest of the economy will begin to unleash that pent-up demand. Companies have been cutting back inessential spending and streamlining their staffing for quite some time now, so now that those tasks are nearing completion, companies can begin to refocus spending on technology that lets them further enhance their operations.
I also expect the manufacturing sector to begin rebounding within the next few months and that will also spur demand for technology that helps businesses optimize and enhance their operations. A lot of technology spending is on a long lead time, so technology that's needed in six months or more will need to be ordered well in advance. As soon as the manufacturing sector begins to see an uptick, then they'll begin hiring and spending at a fairly good pace. Strong consumer demand during the holiday shopping season will also help to spur a turnaround in the manufacturing sector and tech spending in the overall economy as well.
It's Monday again, so it's time for my weekly dollar-cost averaging (DCA) purchase of January 2004 LEAP call options for the S&P 500 Tech Sector "Spider" (XLK).
I'm starting to think that maybe we could start to see a lot of sidelined money flow into the market once Nasdaq can break out above 2000 and stay above that milestone for at least two weeks. And once the 200-day moving average turns upwards. And assuming that we're hearing at least some hints of good news on the tech spending front.
The big news for the next few days will be the initial reports on holiday season shopping. I still expect that consumers will spend far more than the doom and gloom crowd have been suggesting.
The market has traded in a fairly narrow range over the past eight days and bounced back from a correction, so we can infer that Nasdaq now has a reasonable base on which to build a rally to break out of the 2000 level. Traders might decide that the success of the Thanksgiving holiday shopping weekend (or at least the fact that it wasn't a total disaster) is a great reason to take a run at 2000. On the other hand, the diehard pros may say that last Tuesday's decline was not a serious enough test to establish that the base is firm. Within ten days we'll know who's right.
The bottom line: The Fall rally (44 days old) is still intact. 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 25, 2001 11:09:27 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology