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Finally, the cynics were able to engineer a decent sell-off. It had to happen eventually. But, now its done and time to move on.
The bulk of the bad news related to capital spending by telecoms. A slew of warnings came from CIENA (CIEN), Lucent (LU), and Qwest (Q). But I'm not sure why ANYBODY had expected that the telecom sector was quite out of the woods yet. I think this was just an excuse to initiate a sell-off.
I suspect a lot of the selling was really just cascading stop-loss orders. Once the first wave of stop-losses is hit, that selling just pushes the market down further where even more stop-losses are lurking. It's a vicious cycle. Really ugly. But, it's over.
Overall, it was just one of those days when too many people just throw up their hands and say "I'm out" and then wait for another day and a friendlier market. None of the news was really so bad as to justify the massive sell-off.
The various brokerage firms have been trying to engineer a sell-off for weeks now. They finally succeeded. There's only one way to win in the face of such an attack, and that's to just stay in the market and watch the correction and subsequent recovery go right by without selling a single share. The brokerage firms just want the extra commissions.
The weekly Jobless Claims report was much better than expected. It was a VERY positive report. Initial Claims were way down. Continuing Claims were up slightly, but before seasonal adjustments, they were actually down. Most importantly, the four-week moving average of Initial Claims continues to fall. This is all really, really, really good news for the economy. The recovery IS underway, regardless of what Thursday's market action suggested.
The Retail Sales report for November was nowhere near as bad as it was billed in the media. It was a negative report, but not very bad at all. The decline was minimal after you take out autos, gasoline, and clothing. The 0% auto financing had produced an unusual bulge in October. Gas prices fell dramatically. The weather was incredibly warm, so people simply weren't buying winter clothes, yet. Here's an incredible FACT that did not get reported by the media AT ALL: except for auto sales, there was actually a 4.1% GAIN in retail sales in November before the seasonal statistical adjustments are made. In other words, besides the auto financing issue, the negative nature of this report was mostly a statistical fluke. Retail sales as can be seen by looking at the detailed report are MUCH BETTER than the media and market action suggested.
The Producer Price Index for November showed that inflation is well under control. This was a positive report. Core producer price inflation was a little higher than expected, but that's better than having deflation.
Despite the plunge, Nasdaq is still in good shape. Nasdaq has now closed above its 100-day moving average for 23 days straight and above both its 150-day and 200-day moving averages for 8 days. But we are back below the magic 2000 level. The 50-day moving average continues to turn up. The 100-day moving average is flat and the 50-day moving average is just barely touching it. If Nasdaq recovers quickly, the crossing of the 50-day above the 100-day will be a bullish signal.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE by 4.62% on Wednesday to 26.70, which is still in the lower end of the moderately high anxiety zone (25 to 30). This rise in anxiety is actually fairly moderate given the steep Nasdaq fall. In fact, VIX closed at the same level it had reached by 11:00 a.m. There was a definite spike up to 27.16 at about 3:15 p.m. when Nasdaq looked as if it would fall below its 200-day moving average, but that level of support held up, so VIX retreated from the spike despite the fact that Nasdaq closed its low for the day. According to VIX, the market is in decent shape.
The Nasdaq-100 After Hours Indicator had a distinctly negative right tone from the start of the Thursday evening session, but then started to recover as the Oracle (ORCL) conference call progressed, ending almost flat, down 0.16 points. People were still in shock from the daytime plunge and took a while to realize how well Oracle did for a very difficult three months.
Oracle (ORCL) came in on target for earnings but just a little light on revenues. That's actually very good considering the very difficult three months that made up their quarter. They were reasonably optimistic for the coming quarter and year. According to CFO Jeff Henley, "Our fiscal third quarter will be better than our fiscal second quarter, not wildly, but we'll definitely see some revenue progress" and "We think that Q2 will be the bottom, one never knows". There's still plenty of uncertainty, but that's par for the course. I was quite pleased with their results. The stock had fallen off significantly before the report, so there's a decent chance it could now rally in relief that there were no nasty downside surprises.
The Oracle report did not talk about business "accelerating" yet, so my tech stock "safe" index still sits at zero.
Fed Funds Futures suggest a 24% (down from 36%) 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. The bond market realizes much better than the stock market that the economic recovery really is inevitable, and in the not-too-distant future, too.
AMG Data Services reported on Thursday evening that for the week ended Wednesday, December 12, there were OUTFLOWS of $2.6 billion from equity funds. Most of that was from either international funds or large-cap-growth funds. I suspect that a significant amount of the outflows were due to tax-loss selling. $1.9 billion flowed OUT of taxable bond funds. Muni funds reported redemptions. Many tax-free funds are now paying less than 1% interest. $24.1 billion flowed into money market funds. All that cash just waiting for a "safe" stock market.
I didn't do as much dip buying as I had hoped. I did buy Applied Micro Circuits (AMCC) since they were excessively beaten down due to their exposure to the telecom market. I was tempted to buy CIENA, Qwest, or more LEAPS for the Nasdaq-100 Index Tracking Stock "Qubes" (QQQ).
Is the correction over? Not necessarily, but it's not possible to know for sure until it's actually over. I do suspect that it's at least mostly over. Thursday's decline seemed way overdone to me.
The bottom line: The Fall rally (57 days old) is still intact. 3 more days of Nasdaq above its 50-day moving average and I'll "officially" label it a genuine bull market. 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 13, 2001 11:37:32 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology