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It didn't seem that there was any serious selling on Monday, just a combination of anxiety that some serious selling MIGHT occur and wanting to get the Fed rate-cut out of the way. What little selling there was may have been mostly short-term momentum traders who either lost patience with the market or had tight stop-loss orders (2% to 4%) kick them out. A Q1 revenue warning from JDS Uniphase (JDSU) certainly helped put the market in a foul mood.
Banc of America Securities' market strategist Tom McManus cut his recommended equity allocation to 55% from 60%, and raised his bond allocation by 5%. Some institutional investors follow this kind of advise very closely. McManus said that the Fall rally was "excessive". On a short-term basis he is right, but on a long-term basis he is wrong. Take your pick, depending on your own personal investment horizon.
There's a new craze among the cynics: identify companies that MIGHT have an asbestos liability. I knew these guys would have to find SOMETHING to focus on after finishing with Enron (ENE), and asbestos is it. Or at least one of the "its".
Nasdaq has now closed above its 100-day moving average for 20 days straight, above both its 150-day and 200-day moving averages for 5 days, but we're back under 2000. The 50-day moving average continues to turn up. The 100-day moving average turned slightly down. The 50-day moving average will cross above the 100-day moving average within a couple of days; this will be a bullish signal. Nasdaq is much closer to its 9-day moving average, so traders should be more willing to let Nasdaq rally.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE by 4.46% on Monday to 26.00, which is in the lower end of the moderately high anxiety zone (25 to 30). Anxiety has risen as so many of the pros are beating the drum saying that the Fall rally was excessive. People aren't racing to sell, but they do want to see some stronger buying.
The Nasdaq-100 After Hours Indicator started the Monday evening session with a minimal and mixed tone, but then took on a distinctly positive tone and closed up 1.66 points. People were a little relieved that there were no big warnings now that we are into the quarterly confession period.
Xilinx (XLNX) confirmed revenue guidance for this quarter. That's a relief. But there's still the lingering issue of potential warnings for Q1. In any case, so far, so good.
Fed Funds Futures suggest a 100% chance of a quarter-point cut in interest rates at today's FOMC meeting. There's also a 28% (up from 15%) chance of a half-point cut or a 40% (up from 24%) chance of a second quarter-point cut in January. We'll get the quarter-point cut today, but the big question is what kind of cautionary outlook the Fed will offer.
I made my usual weekly dollar-cost averaging (DCA) purchase of S&P 500 Tech Sector "Spider" (XLK) 2003 LEAP call options with a strike price of $26.
Consistent with my buy-on-dip philosophy, I also purchased some Nasdaq-100 Index Tracking Stock "Qubes" (QQQ) LEAP call options. I also purchased some JDS Uniphase (JDSU) and Solectron (SLR) stock. These are long-term, buy-and-hold (not short-term trading) positions. I bought JDS because their Q1 warning also stated that they believe that Q1 really would be the trough quarter. I bought Solectron because it had dipped more than the other contract manufacturers. I'm always looking to buy stocks that have been beaten down more than necessary.
What will the market do after the Fed announcement? That's what everyone is wondering and sitting around waiting for. It could go either way. The market could fall if the Fed suggests that current economic weakness is likely to persist without much relief. Or, the market could rally if the Fed suggests that there are initial signs of recovery. Overall, the Fed is likely to say that there will be lingering economic weakness in the period ahead even as signs of a turnaround are beginning to appear.
We're now in the process of testing the Nasdaq 2000 level. If we pass the test, the rally can continue. It would be best if we bounced back above 2000 within a day, but it's still okay if it takes a couple of days. As long as Nasdaq stays above its 50-day moving average, we'll do just fine.
If the market can just tread water for a few more days, the market technicians will come around to the belief that we aren't going to see a major near-term correction.
People are anxious about the quarterly report from Oracle (ORCL) on Thursday. They're also anxious that other big techs could issue Q4 warnings over the next few weeks. And the big anxiety is for the revisions for Q1 outlooks.
The bottom line: The Fall rally (54 days old) is still intact. 6 more days of Nasdaq above its 50-day moving average and I'll "officially" label it a genuine bull market. I'd also like to see Nasdaq above 2050 (or at least 2020) 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 10, 2001 10:14:36 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology