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Thursday was a throw-in-the-towel kind of day. The selling kept up all day and people felt no need to fight it. Blame it on the warning from Juniper (JNPR) or a dozen other possible "explanations" such as the laughable excuse about security flaws in Microsoft (MSFT) Windows XP. The bottom line is it was just pre-holiday volatility plus over-reaction to a little bad news. Nothing here for serious investors to be concerned about.
Nasdaq futures were actually up until the Juniper warning and then went way south out of any proportion to the fact that Juniper's problems are in fairly isolated parts of the telecom and networking sectors. But, the way the market works on a light day is that traders run with whatever they've got right in from of them and they had a couple of juicy warnings. And once traders depressed the market a bit, they probably bumped into a layer of stop-loss orders which significantly accelerated the selling.
So, why wasn't there any serious dip buying? Probably, like me, people already have enough exposure to the market and with the holidays coming, just don't feel like bothering. Another possibility is that hard-core dip buyers wait until somebody else buys first. So, on some days, there's no dip buying. We've seen a half-dozen of them since the start of the Fall rally. There were a couple of points where it looked like some dip buying, but SOMEBODY decided to quickly sell off the dip recoveries. That doesn't look like normal, random buying, but more like some traders specifically looking to attack the dip-buying. And not just day-traders, because they didn't buy back to close their positions by the end of the day. That's fair, but it doesn't indicate that the sell-off was based on fundamentals. Some of it, yes, but not most of it.
It was definitely an ugly day, but nothing happened that in any way suggests that recovery (of both the economy and the stock market) in 2002 is in jeopardy.
Contract electronics manufacturer Jabil Circuit (JBL) came in light on revenues and warned for the coming quarter. But they did say they expect growth after that. This seems to be the story with a lot of tech companies: Q1 will be the trough quarter.
IT consulting service provider Accenture (ACN) issued an upside surprise, raising both their quarterly earnings and revenue outlook. This was very good news, but got lost in the downdraft.
Juniper Networks (JNPR) issued a dramatic warning. They blamed their Q4 shortfall on service providers and telecom carriers who are being cautious in their tech spending. The market grossly over-reacted to this news. In fact, after the initial opening decline, Juniper actually rose. It stayed fairly flat most of the day, which means that for all the panic selling, there was a roughly equal match of people interested in buying. So, there was no reason for the stock to fall further. A lot of that interest was institutional. Juniper is a good company, but like many companies, the current quarter was a real challenge. A lot of people apparently believe their future is bright. I wonder if they're a takeover candidate.
The weekly Unemployment Claims report showed another nice decline in initial claims, although continuing claims continue to rise. This was a very positive report. We still have a ways to go before employment begins to rise again, but this report shows we're making great progress. It also shows how absolutely lousy economists are at forecasting.
The Philadelphia Fed Survey of manufacturing conditions for December showed a dramatic improvement. The manufacturing sector in the Philadelphia area is still contracting, but at a significantly reduced rate that suggests that a recovery in imminent. This was a very positive report. Once again, the PhD economists failed to forecast a key report within a country mile.
Nasdaq has now closed above its 100-day moving average for 27 days straight, but finally dipped back below its 200-day moving average. 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 200-day moving average is also starting to flatten out. This is all setting up for a strong rally, sometime soon.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE by 3.39% on Thursday to 24.37, which is still in the moderate anxiety zone (20 to 25). There's no dramatic reason for the rise in anxiety other than the significant fall in Nasdaq and people wondering what that's all about. Despite the rise, VIX is still in good shape.
The Nasdaq-100 After Hours Indicator had a mostly positive bias during the Thursday evening session, closing up 2.93 points. Clearly, people thought the Nasdaq plunge was way overdone.
Cognos (COGN) beat both earnings and revenue expectations. Not bad.
Liberate Technology (LBRT) beat both earnings and revenue estimates AND they upped guidance for the coming quarter. Nice.
Manugistics (MANU) beat both earnings and revenue estimates AND they upped guidance for the coming quarter. Another nice report.
Research In Motion (RIMM) met earnings expectations, but came in light on revenue and warned for the coming quarter. Oh well.
AMG Data Services reported Thursday evening that for the week ended Wednesday, December 19, $2.8 billion flowed INTO equity funds. That's a very good sign. Though the money came in, it may not yet have been used to buy stocks. $334 flowed OUT of taxable bond funds. $20.7 billion flowed OUT of money market funds.
Fed Funds Futures suggest a 26% (down from 30%) 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 looks likely. The nice decline in initial unemployment claims was well-received by the bond market. Those guys are reasonably convinced that the recovery is a done deal. I expect the stock market will realize the same, real soon. Well, SOMETIME soon.
According to the New York Stock Exchange, margin debt increased by $4.64 billion last month. Cash in margin accounts fell by $3.52 billion. Those people buying on margin might have gotten hit with margin calls after the recent Nasdaq drop. But not necessarily. They are also the kind of people who would have been more likely to "take some money off the table" when Nasdaq rose so quickly and then started to decline.
It does appears that the fiscal stimulus package is dead, for now. In the end, both sides decided they stood to gain more political benefits by painting the other side as biased in favor of special interests. The really good news is that the economy doesn't need fiscal stimulus, beyond the increased spending due to 9-11, anyway. In the end, we'll be better off without the unnecessary government intervention. The bad news is that Wall Street may see this as a significant psychological setback. Fortunately, there have already been a number of reports that suggest that at least parts of the economy are back to pre-9-11 levels. Even by the administration's own estimate, the stimulus plan would have only added 0.5% to GDP in 2002. And that was being optimistic. I think we'll do okay without the stimulus plan.
There is no need to pay any serious attention to the troubles in Argentina. They've had problems for a while and just need to struggle through them in their own way. The best thing we can do for them is to get our own economy back into growth (and import) mode ASAP.
I continue to believe that Q1 tech business will end up much better than the cynics are suggesting. Management is being ultra-conservative in their forecasting to avoid even the slightest possibility of being hit with class-action shareholder lawsuits that would allege that management hadn't warned shareholders of potential weakness.
So, what's next for the market? First, it is Friday and short-term players tend to close positions before the weekend. Because of the holiday on Tuesday, some participants may consider this a very long weekend. The negative tone of the market may have attracted some short sellers, so those guys would be inclined to take their profits (by buying) ahead of the weekend.
The big plunge yesterday looked way overdone. Traders may want to probe the weakness below the Nasdaq 200-day moving average a bit more, but they might just as well want to see how strong a recovery bounce they can ride. And all the people who got stopped out of positions due to their stop-loss orders will have to think carefully about sitting out any bounce. The idea that the Fall rally is over is absurd. Those who sit out any recovery over the next few days will regret it.
Note that the market will be open on Monday, Christmas Eve, but only until 1:00 p.m. But, many market participants may skip it.
The bottom line: The new bull market (63 days old) continues. I don't expect much of an additional dip 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 21, 2001 12:00:51 AM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology