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Monday's rally was welcome, but it was not a very clean rally. All but six points of the rally had occurred by 10:15 a.m. In other words, within the first 45 minutes of the day. The market then reversed and gave up most of the gain by 11:30 a.m. before slowly recovering to the morning high at 2:30 p.m. Even then, Nasdaq had trouble advancing beyond the morning high until just minutes before the close.
Basically, a lot of players simply cannot accept Nasdaq being at this level. They just keep trying to push the market back down. Unfortunately, for them, just enough buyers are creeping into the market to keep the rally going.
There were some "calls" from the various brokerage firms that fueled the downward push. One strategist cut his stock allocation. Another raised his stock allocation, but by a smaller amount. Yet another recommended switching from tech stocks to "cyclicals". Somebody suggested that the Fall rally is too "mature" to advance much further. And these were heavy hitters, the best in the field. Still, the buyers would not listen and Nasdaq keeps rising.
The National Bureau of Economic Research (NBER) finally made it official and announced that the U.S. entered a recession in April (the peak of the big expansion was in March). These guys really are the official arbiters of recessions, as Fed Chairman Greenspan has said in testimony before Congress. They have a Business Cycle Dating Committee that actually makes the call. They typically need six months or more after the fact to make the calls for peaks and troughs of economic cycles. The peaking of employment is what triggered the April start of the recession. You can check their web site (www.nber.org) for all the gory details.
When will the recession end? There're no definitive criteria. But I would say that an upturn of industrial production would mark the trough. It's unlikely to happen real soon, but I think sometime in Q1 is a good bet.
It's not clear if the NBER recession call had a big impact on the market, but I think it had some impact on the non-tech parts of the market. And it may have prevented the Dow Industrial Average from breaking 10K.
So far, the holiday shopping season seems off to a good start. We still have a long way to go, so be prepared for anything to happen. Last year, Gateway (GTW) preannounced a lousy Q4 solely based on their Thanksgiving weekend performance. I can't begin to imagine what surprises lie in store for us between now and Christmas.
Nasdaq has now closed above its 100-day moving average for TEN days straight. And, the 50-day moving average has turned up a little bit further. The 100-day moving average is still declining and will need another week of gains to begin turning up. Nasdaq had trouble as it bumped into its 150-day moving average, but did manage to poke above it a little right at the close. Traders will insist on testing Nasdaq to see if it can be pushed back under the 150-day moving average. After that, the 200-day moving average is declining quickly and we could bump into it within days. Then, there's the big 2000 which is a mere 58.77 points above us. It won't be hard to break through these levels as long as even just a little new money continues 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, ROSE by 1.82% on Friday to 25.23, which is near the bottom of the moderately high anxiety zone (25 to 30). Despite the market rally, apparently some people are worried that the rally really is over-extended. That does not mean a correction is guaranteed. Just that people are more worried than last week. On the other hand, many people had been off on holiday, so Monday's VIX rise may have just been a technical adjustment and not mean that overall anxiety is much changed. Some people consider this level of VIX to be indicative of excessive complacency. That's a difficult call to make, because part of the VIX level is due to wartime anxiety and we don't have any way to deduce where VIX would be without the al-Qaeda factor. In any case, we should give the market another couple of days to recover from the holiday break. Besides, the flow of money into the market is more important than the VIX level.
The Nasdaq-100 After Hours Indicator had a definite negative tone for the entire Monday evening session, closing down 2.33 points. This could either just be a little profit-taking after a great day, or serious concern that the market is way over-extended. Probably a little bit of both and nothing to worry about.
McDATA Corporation (MCDTA) will join the S&P MidCap 400 Index after the close of trading on Thursday. Typically a stock gets a pop as it enters an index because there are mutual funds that try to mimic the index and must therefore buy shares in the company. I'm not sure what will happen to the Class B shares of McData (MCDT). I in fact own both classes. What a mess! I'm hoping the Class B shares don't fall off a cliff as shareholders instantly try switch to Class A. My best guess is that the Class B shares will also rally, for no other reason than that the Class A shares rally. That may seem stupid, but not everyone who trades in the market is a genius.
Fed Funds Futures suggest a 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.
The "war" is going about as well as could be expected. The latest development is the suggestion that things could start happening with Iraq, such as an ultimatum that Iraq allow inspectors for weapons of mass destruction or else. It's quite easy to imagine that the U.S. could begin involuntary inspections by sending in special operation teams to forcibly inspect facilities. Or, to simply destroy any suspect facilities if inspectors can't access them. But, the bottom line is that we still don't know what will happen. The big question is how the market will react. As long as progress is being made, the market should react favorably. And most importantly, the market will respond favorably as long as the market perceive that the threat of these international terrorists is being reduced on an almost daily basis.
Due to a technical problem with my online broker, I was unable to buy my January 2004 LEAP call options for the S&P 500 Tech Sector "Spider" (XLK) and had to settle for buying the January 2003 LEAPS. But since the price is lower I was able to buy twice as much.
This run of the market is truly unbelievable. As in, it is difficult to believe that it really can keep going much further. It was easy to be a buyer when stocks were really cheap. Now, everything LOOKS so expensive. But, looks can certainly be very deceiving. For people who are not yet in the market in a big way, current prices, or at least dips from current prices, may look very attractive. Especially since the economy is now looking decidedly less risky (ignoring the official NBER recession call, of course) than in the weeks immediately after September 11. In the final analysis, it's all about money flows. As long as money keeps flowing into mutual funds, the market will keep going up. If the money flows peter out or reverse, momentum investors will head for the exits and the short-sellers will have a field day.
The bottom line: The Fall rally (45 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 26, 2001 11:58:18 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology