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That was quite a wild ride after the Fed rate cut, but at least Nasdaq was able to hold onto a modest gain and pop back above the 2000 psychological barrier. Traders did try to push Nasdaq below 2000, but they succeeded for only a few minutes before giving up.
The excitement over the Fed rate cut prevented the market from acting in any kind of normal manner. We'll need two or three days for the market to fully digest the cut and the Fed's revised economic outlook.
Bottom line from the Fed on the economic outlook: "weakness in demand shows signs of abating, but those signs are preliminary and tentative". In other word, the economy SEEMS to be showing signs of some improvement, but it's too soon to be absolutely sure. On the other hand, here's what one of the pros in the bond market had to say: "the statement is about as bearish for the fixed-income market as one could possibly imagine. They say weakness is abating". Note: bearish for bonds is bullish for stocks. I'll stick with what I wrote the night before the meeting: "there will be lingering economic weakness in the period ahead even as signs of a turnaround are beginning to appear".
The Richmond Fed Manufacturing Survey declined further in November. This was a negative report. Manufacturing in places like North Carolina is still in sad shape. The only good news in this report was that respondents are more optimistic about the six-month outlook than any month since July.
The Wholesale Trade report for October showed a sharp decline in both sales and inventories. This was a negative report. But we already knew that October was lousy. Note: the decline in inventories is good.
Nasdaq has now closed above its 100-day moving average for 21 days straight, above both its 150-day and 200-day moving averages for 6 days, and we're back above 2000. The 50-day moving average continues to turn up. The 100-day moving average is close to flat and the 50-day moving average will cross above it within a couple of days; this will be a bullish signal. Nasdaq is close to its 9-day moving average, so traders should be more willing to let Nasdaq rally. The fact that the 2000 level held up is a good sign.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 0.65% on Tuesday to 25.83, which is in the lower end of the moderately high anxiety zone (25 to 30). Given the confusing behavior of the market after the Fed rate cut, I'd give VIX two days to digest the rate cut and the revised Fed economic outlook. At least for now, anxiety seems relatively stable.
The Nasdaq-100 After Hours Indicator started the Tuesday evening session with a very negative tone and then trended up for the whole session, closing up 1.1 points. People were a little confused by the post-Fed market action and unsure what to expect next. But in the end, they were happy that there were no big tech warnings.
After the close: The ABC News/Money Magazine weekly Consumer Comfort Index was unchanged at -3 (from a range of -100 to +100). This was a slightly positive report. Although the overall index was unchanged, slightly more people said things are getting better and slightly more said the economy was in good shape.
Fed Funds Futures suggest a 40% chance of a quarter-point cut in interest rates at the January 30 FOMC meeting. In other words, another rate cut is unlikely unless the economy does worse than expected.
There will be a new trend in coming months: 1-for-10 reverse stock splits. Kana Communications (KANA) just received stockholder approval for theirs. Stock splits don't change the economic value of a company, but very low stock prices are a severe psychological impediment to gaining investor interest. The result is that investor interest could pick up as companies like Kana go from 1.70 per share to 17.00 per share. But stay away from any company with a stock price below 1.00 that is doing the reverse split just to avoid being de-listed by Nasdaq.
Horse-trading is in high gear in Washington on the economic stimulus package. Just about everybody is in the mood for some kind of compromise as long as they each get something out of the deal. Something will happen soon, before Congress goes on holiday break. The market should respond favorably at that time.
The Senate Judiciary Committee will be holding a hearing today on the Microsoft (MSFT) case(s). No earth-shaking revelations are expected, but it will be some negative attention for the company. It will be news, but it won't change the market perception of the company. Microsoft will have a lawyer as a witness, but no executives. The only corporate executives are the CEOs of Red Hat (RHAT) and Liberate Technologies (LBRT). The headline witness is the Department of Justice Antitrust Chief who will have to explain why the settlement really is in the public interest. The official title of the hearing is "The Microsoft Settlement: A Look to the Future."
Everyone is more than a little anxious about whether the Fall rally is going to have a major correction. As usual, if everyone thinks the market could go a certain direction, the market will disappoint them and go another direction. That's why they call the stock market "The Great Humiliator". Sure, we could see a significant dip, but since we already had a minor dip on Friday and Monday, it's too soon to have another one.
The bottom line: The Fall rally (55 days old) is still intact. 5 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 11, 2001 11:42:31 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology