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Monday was the 60th day of the Fall rally. That's three months (twelve weeks of five days with a couple holidays excluded). So, I herewith declare the Fall rally to be a bona fide, legitimate NEW BULL MARKET. We may not be totally out of the recession woods yet, but all signs strongly suggest that we will see a nice recovery (both the economy and stock market) in 2002.
Yesterday's market action was still somewhat lackluster. Nasdaq closed less than two points above the level it reached at 10:30 a.m. All that extra effort for almost nothing. It could be a few more months before the market inspires enough buying to fill anything close to an entire day of trading.
The really good news about the market action was that Nasdaq never managed to give up more than 11 points of the morning gain. That's impressive. Usually, the cynics are able to push the market down substantially even if they go have to let it recover in the end.
Some people probably sold into this rally, since by some standards that was the sensible thing to do. Meanwhile, sidelined money came in to fill the gap.
There was a telltale sharp upwards spike just before the close which usually suggests a lot of day-traders who had been trying to short the market and finally had to buy to close out their positions.
Nasdaq closed off of its high of 1994 reached at 2:30 p.m., but mostly because those shorts tried really hard to push it down. That resulted is some modest profit-taking, but otherwise, the shorts lost out. It was a really good day for Nasdaq, especially considering the incredible cynicism of the too-far-too-fast crowd.
The National Association of Home Builders (NAHB) Housing Market Index rose sharply in December. This was a very good report. Traffic of potential buyers is very strong. You may have heard the "bad" news that mortgage rates had creeped up despite recent Fed rate cuts. That's because mortgage rates are based on supply and demand, and demand continues to be strong. When mortgage rates start declining again, that will signal that demand for housing is declining.
Nasdaq has now closed above its 100-day moving average for 24 days straight and above both its 150-day and 200-day moving averages for 10 days. We're above everything out through the 219-day moving average. But we are still below the magic 2000 level. The 50-day moving average continues to rise. The 100-day moving average is almost flat and the 50-day moving average recently crossed above it; this sometimes suggests that a rally could be imminent.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 2.08% on Monday to 25.43 (from 25.97, not 26.97, on Friday), which is near the bottom of the moderately high anxiety zone (25 to 30). VIX actually spiked up to 26.52 on the open before starting to fall off and only recovered to the Friday closing level at 10:15 a.m., but then did decline modestly for the rest of the day. VIX is in great shape for a continuation of the NEW BULL MARKET.
The Nasdaq-100 After Hours Indicator had a negative tone for most of the Monday evening session, but reversed and ended closing up 0.06 points. People were a bit suspicious whether the quick rebound from last week's sell-off would really stick.
GE (GE) reaffirmed guidance. This is further confirmation that the economy is holding up better than the cynics suggest.
eBay (EBAY) announced the departure of its Chief Operating Officer at the beginning of the new year with the COO duties to be absorbed by other members of the management team. This shouldn't be a big deal, but traders love to ding companies when executives leave.
Solectron (SLR) has moved up its quarterly report by two days to early Tuesday morning. They're doing this because they have some kind of "material announcement" to make. No idea whether this will be good news or bad news or why it couldn't wait two days.
Fed Funds Futures suggest a 20% (up from 16%) chance of a quarter-point cut in interest rates at the January 30 FOMC meeting. In other words, another rate cut is VERY UNLIKELY unless the economy does worse than looks likely. The bond market is virtually convinced that the recovery is a done deal. I expect the stock market will realize the same, real soon.
The fiscal stimulus negotiations continue. Something is still likely this week. The fact that nobody is posturing in public is a good sign. The market should respond favorably once the deal is agreed.
The "war" continues to inch forward. UBL may be hiding, but that's okay for right now, as long as he's effectively inactive. It could take months to clean up all the lingering pockets of resistance. The good news is that an international peacekeeping force will be available soon. The bulk of the heavy fighting and bombing may soon draw to a close. But, we're not quite there yet. And there are numerous terrorist cells who could engage in mischief at any time. And then there's the open question of Iraq.
The Palestinian crisis drags on, but has not taken any dramatic turns for the worse. Arafat is not happy, but he knows that the Israelis (and the U.S.) are doing what's best for him. We could see some progress towards peace within a couple of months.
I made my weekly dollar-cost averaging (DCA) purchase of S&P 500 Tech Sector "Spider" (XLK) LEAP call options. They were January 2003 with a strike price of $26.
How the NEW BULL MARKET acts over the next few days is uncertain. The cynics will try VERY HARD to push the market down. The real question is how much sidelined money wants to get in before any potential Santa Claus rally or the expected January-effect rally. Or, we could end up stuck in a trading range for the rest of the year.
We're still in the quarterly confession period, so there could be plenty of bad news. But I suspect there will also be plenty of reaffirmations of guidance. And there will likely be the occasional upside surprise. I think we're in good shape.
I'm personally not expecting to put much more money in the market over the next few weeks, other than my weekly dollar-cost averaging program. I already have more than enough exposure to the market, especially with my Nasdaq-100 Index Tracking Stock "Qubes" (QQQ) LEAP call options plus a bunch of chip stocks.
The bottom line: The Fall rally (60 days old), now a bona fide BULL MARKET, continues. I don't expect much of a dip (3%, if at all) until after we've rallied well above 2100.
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 17, 2001 11:18:11 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology