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Nice rally. Nasdaq finally broke through its 200-day moving average. Unfortunately, it exceeded that milestone by only 14 points and that could have all been short covering. In fact, despite the strong rally, Nasdaq actually pulled back from it's first foray above the 200-day moving average and had to regroup a little before decisively breaking through (at least for the day).
Nasdaq spent the morning and early afternoon in a narrow trading range after an initial little pop on the open. Only at 1:30 p.m. did Nasdaq finally take off on a fairly nice, clean "escalator" up right into the close.
As far as I can tell, there was no special event or news that triggered that 1:30 p.m. rally. It most likely was just a modest amount of real, serious buying by some sidelined money. Maybe an index mutual fund had some cash to deploy. And then once the rally started, short-sellers had to cover positions, especially when buying held up as Nasdaq ran through its 200-day moving average.
Unfortunately, a sustainable rally cannot be built on less than half a day of buying. We're back to the issue of follow-through. But at least the market is coping fairly well with the wall of worry.
Banc of America recommends buying IT service stocks. This is a good sign.
Comments from Cisco (CSCO) still do not rise to the level of seeing an acceleration of their business that would be needed to help trigger my tech stock "safe" index. Basically, they're seeing some stability, but they still don't have much visibility. On the other hand, they should be given much credit for trying to manage expectations as conservatively as possible.
Oracle (ORCL) CEO Larry Ellison says "Our business has at least stabilized. It's not getting worse". Once again that kind of comment still doesn't help trigger my tech stock "safe" index. We're looking for acceleration, not just a trough or stability.
Nasdaq has now closed above its 100-day moving average for 16 days straight, and just jumped back above its 150-day moving average. But most significantly, Nasdaq has finally broken above its 200-day moving average. The 50-day moving average continues to turn up. The 100-day moving average is still declining and will need a few more days of gains to begin turning up. Within a few days we could be above the 2000 level as well. Some traders will try to push Nasdaq as far and as quickly as possible, even as other traders try as hard as possible to push it back down. The real question is when we will see enough serious buying (or selling) to get Nasdaq out of this trading range.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 2.58% on Tuesday to 25.33, which is at the lower end of the moderately high anxiety zone (25 to 30). VIX was actually up a modest amount until 2:30 p.m., and then it fell sharply. This was a very slight drop given the strong Nasdaq rally, so people are still skeptical whether we're really seeing a break-out from the recent trading range or just a one-shot rally that will quickly evaporate and reverse. On the other hand, it's actually good to see some skepticism, otherwise the cynics will say we're being overly complacent.
The Nasdaq-100 After Hours Indicator started the Tuesday evening session with a positive bias, but then turned mixed, and then took on a negative bias, closing down 1.57 points. But it's typical to see a little profit-taking after a big rally. Especially if the rally may have culminated with short-covering. The rally probably seemed a bit too much for some people.
After the close: The ABC News/Money Magazine Consumer Comfort Index fell slightly to -3 (within a range of -100 to +100) from -2 last week. This was a slightly negative report, but the index is still higher than two weeks ago and a change of one point is not really all that significant. Consumers really are hanging in there.
Fed Funds Futures suggest a 96% (unchanged) chance of a quarter-point cut in interest rates at the December 11 FOMC meeting. The cut is now a virtual certainty. There's also now a 24% (up from 20%) chance of a second quarter-point cut at the January meeting.
I saw a quote from one skeptical money manager who suggested that tech stocks have risen (unreasonably) because some people believe these companies are going to have a strong Q4. Huh? I have not seen any hint of people believing in a strong Q4. The most optimistic of the optimists are talking of a trough in Q4.
The congressional conference committee has been formed for the fiscal stimulus plan. Now they can get down to serious business (i.e., negotiating). Something is definitely going to come out of this, and soon. We just don't know what it will look like. But it will happen, if not this week, then next week. The market should get a psychological boost from this stimulus plan as soon as it becomes clear whether it is good for both the long-term and the near-term economy. In theory, the net impact of a fiscal stimulus plan should be something on the order of a 0.5% increment to GDP over one year. At least that's what Glenn Hubbard, Chairman of the president's Council of Economic Advisors, said during a presentation at the Heritage Foundation on Tuesday (which I actually got to attend). He calls the plan "Growth Insurance". Of course, there is no finalized plan, yet.
After a strong rally, many people expect that it's okay for the market to take a little breather. But we've been taking so many breathers in the past two weeks, we're rested and ready to do some sprinting.
There is a risk that enough people are skeptical of the rally that we could see a complete reversal of yesterday's gains. That may not be a likely scenario, but it is possible and something to be at least emotionally prepared for.
The bottom line: The Fall rally (50 days old) is still intact. 10 more days of Nasdaq above its 50-day moving average and I'll "officially" label if a genuine bull market. I'd also like to see Nasdaq above 2050 for at least a week before blessing the new bull. A modest dip (say, 5%) is to be expected, but any significant dip should be bought.
Short-term economic outlook: The trough for the recession was probably the second half of October and the economy has slightly improved since, even if not yet noticeable by economists (they won't have a handle on November until January). As December and January 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: December 05, 2001 12:10:04 AM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology