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Yet another boring gain to close out a boring week. In fact, the whole month of December has been boring. But, I'll take the gain. Friday was a 3-minute market, with Nasdaq reaching it's closing level by 9:33 a.m. The rest of the day amounted to just a bunch of day-traders playing around. The high for the day was reached by 10:05 a.m., which also suggests that there wasn't very much serious (long-term) buying.
The Conference Board Consumer Confidence Index rose more than expected in December. This was a very positive report.
The weekly Jobless Claims report was a little better than expected. I'd rate it a positive report since the four-week moving average of Initial Claims fell, despite the fact that claims did increase slightly for the week. The whole point of using the moving average is that there always will be flukes that are not true changes in the direction of the trend. Unfortunately, Continuing Claims are still rising and will for a couple of months, but that's expected in the early stages of a recovery.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) rose significantly. This was a very positive report. The index is almost up to the level of the first week of August and the six-month smoothed growth rate is the best its been in over a year. Some components of this index are still weak, but it really is looking like an economic recovery within three to six months is a done deal.
The Chicago Purchasing Managers' Index (PMI) increased slightly in December. This was a slightly positive report, but the index level shows that manufacturing in the Chicago area is still contracting. The New Orders component of the index rose, indicating that the future is looking brighter, but even this component is still contracting.
The Durable Goods report for November showed a decline, but that's because there was a large spike of aircraft orders in October. Excluding defense, there was a nice INCREASE in orders for capital goods. Chip equipment and computers showed increases, but communication equipment showed a slight decline. This was a positive report. The manufacturing sector is not out of the woods, but is showing some stabilization.
The New Home Sales and Existing Home Sales reports for November both showed more strength than expected. These were both positive reports.
Overall, the economic data on Friday was very encouraging.
Nasdaq has now closed above its 100-day moving average for 32 days straight and above its 200-day moving average for 5 days. 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. Some pros use the 50-day moving average crossing above the 200-day moving average as a rally trigger. That may be a week or two (they're 70 points apart). Incidentally, on only 7 days of the Fall rally has Nasdaq closed above the current level. That's a good sign as we're starting to creep up on the recovery high. Steady and methodical is more sustainable.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE by a very slight 0.22% on Friday to 22.33, which is just above the middle of the moderate anxiety zone (20 to 25). There was no VIX data after 3:30 p.m., so VIX probably would have fallen a bit as the market rallied into the close after looking like it was faltering. VIX hit a day high of 23.10 at 3:00 p.m. as the market was showing some weakness. Still, VIX is in great shape and shows a nice combination of moderate anxiety and moderate optimism.
The Nasdaq-100 After Hours Indicator had a mixed but slightly negative tone for the Friday evening session, closing down 0.32 points. No sign of much optimism there. Some people are clearly worried that the recent rise, modest though it was, may not stick when the heavy hitters get back from the holidays. But, the after-hours trading really was inconclusive.
Oracle (ORCL) did announce a modest layoff. That may have been enough to give the after-hours trading a negative bias.
Fed Funds Futures suggest a 26% (unchanged all week) chance of a quarter-point cut in interest rates at the January 30 FOMC meeting. The Fed rate-cutting campaign is over. Given the tentative state of the economy, it's unlikely that interest rates will start to rise until the Summer or Fall.
The guys at briefing.com have offered a list of beaten-down tech stocks that may see a bounce after tax-loss selling subsides: Palm (PALM), Applied Micro (AMCC), Corning (GLW), JDS Uniphase (JDSU), Comverse Tech (CMVT), EMC Corp. (EMC), Nortel (NT), Vitesse Semi (VTSS), Broadvision (BVSN), ADC Telecom (ADCT), PMC-Sierra (PMCS), Power-One (PWER), Tellabs (TLAB), Solectron (SLR), Qwest Comm (Q), Mercury Interactive (MERQ), Siebel Systems (SEBL), Gateway (GTW), Lucent (LU), Nextel (NXTL), Sun Micro (SUNW), Cisco (CSCO), Oracle (ORCL), Broadcom (BRCM), Avici (AVCI), and Commerce One (CMRC). Among others.
You can safely ignore the little fracas between Pakistan and India. Those two have been quarrelling for decades. The current flare-up is about exactly one thing: money and favor. The U.S. had to make some kind of behind-the-scene deal to get Pakistan's cooperation in the war against terrorism. Now, India wants comparable treatment since they are now also fighting terrorism. The heated rhetoric and military maneuvering will continue until the U.S. offers India some kind of aid or trade deal that will help their economy. Also, they may want the U.S. to get involved in settling the Kashmir border dispute. In any case, most of what's going on now is just posturing and it it extremely irresponsible the way the media is tossing the emotionally charged word "nuclear" into the reports. Hopefully the market will continue to react in a more responsible manner than the media. So far, so good.
Notice how much negativity and caution you see in the media? Well, it's a well-known effect that the media is exactly backwards at economic and market turning points. Back in March of 2000 everything was considered rosy, just before the peak. Now, just as the economy really is poised for an up-turn, so many journalists have been gnashing their teeth about how bad things are. That's the key: they write based on the evidence of how things are rather than projecting how things will be in a year. That's okay, it's their job to stick to the facts. But it's my job to figure out how to be positioned for the future.
Another media observation is that there actually has been a change in leadership of the "R" words from recession to recovery. As negative as the media has been, recently they're switched from talk of a recession to downplaying the prospect of a recovery. But now that the recovery word is being used, eventually its positive connotations will overwhelm the previous negative usage. The Economist magazine is famous for actually measuring the frequency of the recession word in the media as an indication of how likely a recession is. If their thesis is correct, the new ascendancy of the recovery word is a good sign for the economy and the market.
The market really is in good shape for a decent rally in January. The market is having a little difficulty with the psychological Nasdaq 2000 barrier, but soon that will be behind us. The only concern I have is how big a correction we'll have once the next big run-up loses steam. People are smarter about taking profits. The question is when we'll get to the point where there's enough steady flow of money into the market that profit-taking gets overwhelmed by new money that's afraid of missing the train. That may not happen until we start to see hard evidence that the recovery is here and not just a promise. My tech stock "safe" index will also have to be starting to tick higher to show that the tech sector is seeing a business recovery as well. I don't have much confidence of that happening in January or even February, but there's a good chance in March and April.
My prediction for 2002? Nasdaq will gain somewhere in a range from +40% to +100% (2800 to 4000). If you force me to pick a discrete number, I'll say +75% (3500). Remember that the stock market is a discounting mechanism, so in December 2002 the market will be anticipating what earnings will be like for Q2 of 2003 (18 months from now).
It's a Monday, so it's time for my next weekly dollar-cost averaging (DCA) purchase. I'm sticking with S&P 500 Tech Sector "Spider" (XLK) LEAP call options. The great thing about the narrow trading range of the market over the past few weeks is that it compresses down the volatility component of the option premium. That means my previous purchases lost some of their value, but my new purchases are made at a lower cost basis which allows me to buy more for the same price. The weakness of AOL (AOL) over the past few months has also held back XLK a bit compared to the Nasdaq-100 Index Tracking Stock "Qubes" (QQQ). But lately AOL has shown some buying interest. AOL will move up as soon as the economy recovers enough to suggest that advertising sales will grow again.
One caution: it's going to be a very bumpy road over the next six months. There will be occasional setbacks. We could see a preliminary recovery and then maybe a slight relapse before the recovery continues. There are likely to be a few events that may or may not be terrorist attacks and the lack of certainty could unsettle the stock market and the economy. In the end, all those speed bumps will fade away, but there will be plenty of anxious moments while they are happening. Be prepared for ANYTHING to happen. But that includes plenty of positive surprises that will likely overwhelm the few nasty surprises. All of this argues for a long-term, buy-and-hold approach to investment coupled with a little dip buying or else you'll be spending far too many hours running in circles and gnashing your teeth. But, some people prefer the drama of active trading. Both camps should have plenty of opportunity.
Today is the final trading day of the year, so trading could be very volatile. There could be a little last-minute tax-selling. But there could be a little window-dressing buying by fund managers as well. Nasdaq should creep up a bit more, possible testing the magic 2000 level again. But I wouldn't be surprised to see a minor sell-off by the cynics who realize that their days are numbered.
Get ready for Wednesday. The results of the first five trading days of the year are supposed to be highly suggestive of how the rest of the year will trade.
The bottom line: The new bull market (3 months, 1 week, and 3 days old) continues. I don't expect much of an additional dip (4%) 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 30, 2001 11:23:45 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology