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That was a half-way decent bounce-back rally on Friday. It only recovered less than half of Thursday's loss, but definitely proved that the sell-off was short-lived.
Traders made a half-hearted test of the Nasdaq 200-day moving average in mid morning and they failed. They made a second test around noon and failed again. That second failure kicked off a nice afternoon rally.
Cirrus Logic (CRUS) reaffirmed quarterly guidance. But they does not say anything about how they will fare in Q1.
Honeywell (HON) reaffirmed quarterly guidance. They're an old economy technology company, but they're probably a good surrogate for the overall economy.
The Semiconductor Equipment and Materials International (SEMI) book-to-bill ratio (orders divided by shipments) rose slightly in November. Unfortunately, both orders and shipments continued their decline, just that orders declined at a slower pace. This was a negative report, but does suggest a bottoming is in progress. The next two months are likely to show declines in orders, but by February we could well see chip equipment orders start to rise again.
The Q3 "final estimate" for GDP showed a slightly sharper decline than the PhD economists had projected. The decline was due not so much to people buying less goods, but those goods coming from inventory rather than additional production. Sales from inventory don't count towards GDP, only the original production of those goods was counted back in Q1 or Q2. This significant drawdown of inventory is a bullish sign going forward since there will be less inventory to satisfy customer demand, so production will have to increase. For now, this was a negative report, but it's such old news that most people will simply ignore it. Incidentally, "nominal" GDP actually GREW by 0.9% in Q3, but then you subtract a "GDP deflator" (inflation) of 2.2% to get the 1.3% decline in "real" GDP. The overall economy is about $10.23 trillion a year.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) fell slightly, but the six-month smoothed growth rate continued to improve and is now better than its level on August 17. This was a mixed, but still positive report. The index continues to point to the prospect of an economic recover within a couple of months.
Personal Income fell slightly in November, but personal spending fell even more. This was a fairly neutral to slightly negative report. As long as personal income does not drop significantly, the economy will be in good shape. Consumers spent less, but ended up saving more. This partially explains the weakness in retail sales. The good news is that savings are good and that money can be deployed elsewhere in the economy such as loans to businesses and support for capital investment.
The University of Michigan Consumer Sentiment Survey showed a better than expected improvement for December. Both the current conditions and the expectations components of the index showed improvement. We're almost back to the August level of confidence. That may not sound like a great place to be, but the fact that consumer confidence is on an upward trend is a very good sign.
Nasdaq has now closed above its 100-day moving average for 28 days straight and is back above 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, FELL by 4.47% on Friday to 23.29, which is still in the upper half of the moderate anxiety zone (20 to 25). VIX trended down all day, but not without occasional little upward blips. VIX is in very good shape. People feel that the market has held up well despite some dramatic sell-off attempts. Anxiety has fallen significantly, but not so fast as to suggest that the market is overly-complacent. Of course, the cynics are certain that the optimists are way too over-confident. That's the tension, the wall of worry, that a bull market likes to climb.
The Nasdaq-100 After Hours Indicator had a mostly positive, but erratic bias during the Friday evening session, but gained strength and managed to close up 3.51 points. Ah, a little of the old optimism returns. Or maybe just relief that there were no big tech warnings.
After the close, the Federal Reserve reported that commercial and industrial loans were up for the week ended December 12. Imagine that, businesses actually borrowing more money. That is a good sign.
Fed Funds Futures suggest a 26% (unchanged) 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. I believe the Fed's rate-cutting campaign is over. And given the tentative state of the economy, it's unlikely that interest rates will start to rise until the Summer or Fall.
Good riddance to the misguided fiscal stimulus package. Congress does not come back into session until late January. The positive spin on the failure to enact the package is that this gives everyone a month to see if the economy maybe can start recovering by itself. I believe the economy is much stronger than the numbers and economists suggest and that NO further fiscal stimulus is needed.
There is a very strong likelihood that there will be no fiscal stimulus plan AND the Fed will discontinue its rate-cutting campaign. Imagine that: the economy will be standing (although a bit wobbly at first) on its own two feet without any additional government intervention. It may initially come as a shock to the market, but once the reality sinks in, this could be the big catalyst that finally prods substantial amounts of sidelined money to flow into the market. Ultra-low money market rates and declines in bond funds will also be stock market catalysts over the next few months.
In truth, Wall Street is happiest when Washington is out of the picture. Any time the government offers a financial handout, there are usually plenty of financial strings attached that result in a cure that is worse than the ailment. In the case of fiscal stimulus, the downside is that it keeps the Federal debt higher than otherwise and that puts upwards pressure on long-term interest rates and that keeps downwards pressure on corporate profits.
According to Charles Plosser, dean of the graduate business school at the University of Rochester, "Humility (whether admitted to or not) is a necessary characteristic that anyone must possess who is foolish or stubborn enough to repeatedly try to predict the future of the economy." Thus inoculated, this card-carrying economist then proceeds to predict that the new recession will be one the mildest in U.S. history. He believes real GDP growth should become modestly positive in Q1 and gradually strengthen during the year with the second half of the year approaching an annualized 4% real GDP growth rate. He co-chairs the Shadow Open Market Committee which is a group of elite economists that meet twice a year to discuss monetary policy. I've attended their last three meetings. He seems very competent and thoughtful. He's written a white paper detailing the justification for his optimistic view of the economy in 2002. He doesn't think the fiscal stimulus is either needed or was a good idea to begin with. He also notes that tax rates were scheduled to start declining in January anyway.
How bad will Q4 GDP be compared to Q3's 1.3% decline? There are so many variables that we simply are not able to predict very well at all. But, I do feel confident (90% certain) that real GDP growth in Q4 will be SOMEWHERE in a range from a decline of 2% to a gain of 1%. That's a very wide range, but that's how uncertain things are. The mid-point of that range is a decline of 0.5%. A tighter range would be a decline of 1.5% to a gain of 0.5%. Admittedly, I'm optimistic, but I think I'm also being realistic.
The Argentina mess can still be safely ignored. Our role should be limited to getting our own economy back into strong (but sustainable) growth mode.
The "war" may seem like it's become a "quagmire", but that's just what it will look like on occasion. We're in a phase where it's time to let the dust settle and do a little housekeeping. Yes, it's a rather messy affair, but that's what war is about.
The "shoe bomb" shouldn't be too big a negative for the market. The bright side is that now we know how well the flight crew and passengers themselves can block attempted acts of terrorism.
The Palestine mess seems almost under control. Of course, it's always on the edge of being totally out of control, but right now it's not as bad as it could be. There's probably enough pressure being applied to start moving this mess towards some kind of solution.
Interesting tech tidbit: According to Reuters, South Korea has the highest penetration of broadband services in the world with 7.5 million high-speed Internet users from a population of 46 million. This came up because Microsoft (MSFT) is buying into SK, the Korean telecom company, to leverage that broadband demand into use of Microsoft products and services.
Philip Roth, a technical analyst at Morgan Stanley, says that there is a strong correlation between the first week of January and the rest of the year. Now he tells me. I remember the first week of January 2000 very well. The market rallied on Monday and then proceeded to fall off very sharply. We were all sitting around waiting for the January effect and we got a sell-off instead. The rest of the year was like that first week. Q1 turned out fine. But April through December was excruciatingly painful. I don't put a lot of faith in this technical analysis stuff, but I will be watching that first week like a hawk because so many of the pros do pay attention to the stuff. I suspect that both this week and next will be fairly positive. The recent sell-off has simply laid the groundwork and built a more solid base to support a substantial rally.
I'm sure the cynics are still convinced that the Fall rally was all just a dead-cat bounce bear market rally and that before long we'll be testing the September low again. Hey, we all have to have our little fantasies, don't we?
Don't get too bummed out by the so-called reports that say that Christmas shopping was worse than expected. The retailers may have been a bit too optimistic, but they're still going to do much better than the cynics have been suggesting. And even if holiday sales are off a little, that means the money is available for other things. The economy has been getting a little too dependent on pure consumer spending, so shifting the money elsewhere would be beneficial for the long-term health of the economy.
Here in New York City, there seems to be plenty of activity, including shopping. It's not possible to tell whether things are worse than a year ago or whether things are even better. I do know there was a mob of people out late on Sunday evening to see the Christmas tree at Rockefeller Center even though it was cold and raining. Some people just don't give up.
With the market closing early today at 1:00 p.m., it should be easy to sustain any initial positive momentum for the whole session. We still don't have enough business to fill the whole day for many days at a time, but we do have enough buying on occasion to keep the cynics and shorts at bay even if they do have a great day or two on occasion. The balance of power is gradually shifting from the cynics to the optimists a little more as every day ticks by.
I'm starting to think about what would be a reasonable goal for Nasdaq in 2002. I may just go with a simple 50% gain to 3000. And that assumes that by Q3 we really do get back into a reasonable, but not outrageous, growth mode.
For all you cynics, Winter just started and it's going to get colder. For you optimists, there are only 86 days till Spring and the daylight hours have started getting longer.
The bottom line: The new bull market (64 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 23, 2001 11:26:40 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology