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Hey, the market survived the Enron (ENE) debacle! People were really worried, but we made it. Still, it was quite a struggle. Despite opening up 10 points, it wasn't until 1:45 p.m. that Nasdaq was finally able to rise above that opening level without falling back. It looked as if sidelined money waited most of the day to make sure the market wasn't going to fall off a cliff again, and then the money came pouring back into the market. It also looked as if there was a fair amount of short covering by people who may have expected significantly more "contagion" from the Enron affair.
The really good news is that little dip we had on Wednesday and recovered from on Thursday will provide a much firmer base for coming rallies. Technical strategists like to see occasional tests and evidence of a bounce back after the test.
After the shock of the Enron implosion on Wednesday, people mostly held their breath until it became clear that the market was not going to fall apart further. Thank heavens for those dip buyers who keep the market afloat even when everyone else is afraid to even open their eyes.
The weekly Jobless Claims report was much worse than expected. It broke our four-week winning streak of declining initial claims. Still the level of claims is significantly below that level normally associated with a recession. Continuing claims also rose significantly. Yes, this was a negative report, but one week does not tell you anything about a trend. In fact, the four-week moving average of initial claims did decline with this latest report.
The Durable Goods report for October showed a big improvement over September. This was a very positive report, positive enough to outweigh the Jobless Claims report. The inventory to sales ratio improved. Chip orders were down, but computers and communications equipment were up. Airplane orders were way up.
The New Home Sales report showed better than expected improvement in October. This was a positive report. Housing continues to be a dependable source of strength in the economy.
Nasdaq has now closed above its 100-day moving average for 13 days straight, and just barely squeaked back above its 150-day moving average. The 50-day moving average has turned up even further. The 100-day moving average is still declining and will need another week of gains to begin turning up. The 200-day moving average is less than 30 points above the current level. Within a week we could be safely above both it and the 2000 level as well. Unless another Enron comes along.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 5.37% on Thursday to 26.26, which is towards the lower end of the moderately high anxiety zone (25 to 30). Anxiety fell off a little bit shortly after the open, but VIX stayed above 27 until 3:30 p.m. when it finally began to fall sharply into the close. Anxiety is still higher than before the Enron collapse, but has noticeably improved in just one day. Strategists will note the elevated VIX level and refrain from suggesting that the market needs to sell off further due to excessive complacency.
The Nasdaq-100 After Hours Indicator started the Thursday evening session with a positive bias, but turned deep south on the Novellus (NVLS) conference call, closing down 6.38 points. Somebody was very disappointed. Or, maybe people were overly optimistic and a little reality was more than they could handle.
Novellus (NVLS) reaffirmed guidance for the current quarter, but said it was less optimistic about the next two quarters. This is because their guidance for this quarter is light on orders which will be producing revenue to coming quarters. The stock was very strong during the day, so the after-hours weakness could just be a little of the old "buy on rumor, sell on news" reasoning. The daytime crowd may have a different view that the night crew. Also, a big dip in the price might draw in some dip buyers.
AMG Data Services reported Thursday evening that for the week ended Wednesday, November 28, $2.2 billion flowed OUT of equity funds, but most of that ($1.4 billion) was from international equity funds. Technology funds saw OUTFLOWS of $517 million. Ouch. $781 million flowed into taxable bond funds, with almost half going to government funds and $292 million to junk bond funds. $16.8 billion flowed INTO money market funds. There's a lot of money out there that COULD go into stocks. It's disappointing that money flowed out of tech stock funds. On the other hand, it could well be that the current tech rally is being fueled more by retail investors who buy their own stocks, hedge funds, and institutional investors rather than mutual funds. Also, last week was a holiday week, so maybe people had more important things to focus on than the stock market.
Fed Funds Futures suggest a 94% (up from 80%) chance of a quarter-point cut in interest rates at the December 11 FOMC meeting. The cut is now a virtual certainty. But, futures do not hint at any more cuts after that, yet. The bond guys are factoring in a touch more economic weakness, but not much.
It looks as if we might finally get a fiscal stimulus package approved next week. There's no guarantee with all the partisan squabbling going on, but it looks likely. Whatever the deal is, it won't do much, if anything, for economic growth in Q4, but should help boost growth in Q1 and Q2. Why am I so confident that something will come soon? Here's a quote from an aide at a stormy GOP meeting Wednesday night: "[Treasury Secretary Paul] O'Neill has been saying that to do something to help the economy by the second quarter of next year, you've got to act now. And the second quarter data is what you are going to run on". It's all politics. All the time. The mid-term election of 2002 is less than a year away.
The "war" is going rather well. But it still has a long way to go, especially if Iraq pops up on the radar screen. There still is the potential for further terrorist attacks, but people are now better suited to cope with them. Oh, and the FBI is supposed to try to open the Leahy anthrax letter today... the envelope please...
Rep. John Dingell, a Michigan Democrat and ranking minority member of the House Committee on Energy and Commerce, informs us that Enron "apparently lied for years in its financial statements." What a shocking revelation. He also asks: "Where was the SEC? Where was the FASB (Financial Accounting Standards Board)?" Great questions. Finally, he says that "There are likely other ticking time bombs out there with smoke-and-mirror earnings. Our accounting and auditing systems and its oversight are seriously broken and need immediate reform." Points well taken. Yes, we'll have numerous hearings and investigations. But, in the final analysis, for every financial loophole you close, you just introduce more incentive for the financial rocket scientists to come up with even more subversions. It will never end.
Is Enron dead yet? Not quite. The bankruptcy experts think there's a chance they could actually escape without filing Chapter 11. Hey, when we're talking financial rocket science, the sky is the limit. It's all a question of whether the bondholders think they have a good shot at getting more from letting Enron limp along or to go through some restructuring. Either way will give the bondholders a "haircut". Stay tuned. Or just ignore the whole thing. Your choice.
I picked up a little NVIDIA (NVDA) since they were being added to the S&P 500 Index after trading on Thursday. I hate buying such pricey stocks. But their business seems to be doing so well. Their chips are in the hot new Microsoft (MSFT) Xbox.
There is a lot of optimism for tech stocks out there, but it may be close to equally matched by those who believe that tech stocks are no longer undervalued. The wildcard is all the people sitting on the sidelines growing more envious as every day of rally goes by. Sidelined money is glad they missed the Wednesday Enron debacle, but saddened that they missed the Thursday recovery rally. The mixed economic reports further add to the confusion. The fact that companies are still reporting that they are seeing weakness or lack of visibility in their businesses doesn't help either. The market may continue to trade sideways for a while, but probably with a slight upward bias. This is what they mean when they say that a bull market climbs a wall of worry. Love it or leave it. This is what investing is all about.
The bottom line: The Fall rally (48 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: According to the November Fed Beige book, the economy was still soft through mid-November. I won't disagree with that, but I still think the trough was in mid-October and the economy has slightly improved since, even if not yet noticeable by the Fed economists. As November and December progress we will gradually start to see more incremental signs that the economy is beginning to recover. Not a large improvement, 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. But, October and the first half of November were 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, probably late in Q1 of 2002. The manufacturing sector won't trend up from a trough until sometime in Q1.
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 29, 2001 11:42:08 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology