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. I continue to peg Q2 of 2002 as the timeframe for the return of strong growth for the bulk of the tech sector. There may be lots of little rallies over the next few months, but just as many bouts of "profit taking".
Current short-term economic outlook: "Life in the trough". Don't count on much if any sign of a strong recovery in the next few months. MAYBE a bit of slowing of the decline or even a little "stabilization". With at best a few "hints" of improvement. The economy is at an "inflection point" where its true trend won't be discernable for a few months. The gradually strengthening positive forces will only slowly overtake the gradually weakening negative "drags" (e.g., layoffs and cost cutting) that are still very strong.
The market did not sustain any real enthusiasm for the U.S. Department of Justice decision to drop parts of the Microsoft (MSFT) antitrust case (see discussion below). Basically, the market rallied for all of fifteen minutes and then was right back where it started and then ground lower mercilessly for the rest of the day. The short sellers covered their positions on the Microsoft news and then re-opened them when no additional buyers entered the market.
The bottom line with this market was that people are just waiting for the "test" of the April low. No need to buy until the test is complete. That seems to be the general attitude.
The National Association of Purchasing Managers (NAPM) Non-Manufacturing (service) Business Activity Index declined unexpectedly in August. This is a very negative report, especially given the importance of the service sector to our economy. Still, August is a strange month with so many people on vacation, so I wouldn't get too depressed unless the September report fails to bounce back.
The Jobless Claims report was roughly neutral to slightly negative. The worrisome part is that "continuing" claims are still slowly piling up. The good news is that the "initial" claims are not accelerating.
The Chain Store Sales report was roughly neutral. The numbers themselves were positive, but not enough to keep people from worrying that consumer consumption is weakening somewhat despite the tax rebate checks.
The Oil and Gas Inventories report was a slight negative. Inventories are down and that means prices will rise, but not too much. Nothing worrisome here, yet. OPEC is scheduled to cut production in September, but U.S. imports of oil are down anyway. The long-term trend of a decline in oil and gas prices is still likely.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, jumped up 12.15% (that's a lot) on Thursday to 32.48, which is now solidly in the high anxiety zone. VIX gapped up on the open to just over 30 (the edge of the high anxiety zone) and trended up until it spiked up to about 32.80 between 12:30 p.m. to 12:45 p.m. and then trended down until around 2:50 p.m. It had another spike up to 32.80 between 3:15 p.m. and 3:30 p.m. and then fluttered wildly into the close. Anxiety is definitely way up. Maybe it's just people getting excited that we may be on the verge of "testing" the April low. But the Intel (INTC) news may calm people a little, but just a little.
The Nasdaq-100 After Hours Indicator jumped up in the Thursday evening session and closed up 11.07 points on the news that Intel (INTC) was roughly reaffirming guidance. The initial euphoria started to wear off, but then picked up steam as the session wore on and closed at the high. The old optimism has returned, if only briefly. Either that, or a boatload of shorts decided they needed to cover their positions in a hurry. Or some combination of the two. Now to see if the day session can show some follow-through.
Intel (INTC) didn't have any particularly great news to report in their mid-quarter report, but the really good news was that the news was better that the market was prepared for. The bottom line is that Intel is plunking along, possibly showing some signs of stabilizing. They are certainly not out of the woods yet, but there are not a lot of reasons to get too much gloomier about their outlook.
Fed Funds futures suggest a 65% chance (up from 60%) of a quarter-point cut in interest rates at the October 2 FOMC meeting. Futures are once again pricing in a 100% chance (up from 80%) that the quarter point cut will happen at all this fall. The cut in October is fairly likely, unless the economy shows clear and robust signs of improvement, not just "stabilizing".
It's too soon to evaluate the full impact of the DOJ decision to back off on parts of the Microsoft case since the case is so complex. But this decision is really good news since it dramatically reduces the scope of the case. Maybe the market is too focused on the current lack of demand for PCs and Microsoft products. Maybe the market is concerned about the government attempting to expand the case even as they drop parts. Maybe the market is concerned that the European Commission investigation which somewhat parallels the DOJ effort is ongoing and expanding. Maybe the market is worried about the private suits that can still continue based on the parts of the case that remain. Maybe the market thought that this latest twist was eventually going to happen anyway. In any case, this twist IS really good news. It does remove a significant element of uncertainty. Maybe the analysts did not get excited because their legal counsel had not fully evaluated the decision's effects or they want to wait two weeks to see how the new judge begins to treat the case. Based on what I saw at the Tobacco litigation hearing the other day, the legal judgment of analysts is at least somewhat suspect. The government is basically walking away of the primary original thrust of the case: that Microsoft was using its OS monopoly power to prevent Netscape from competing as a "platform".
The "conduct remedies" that will be negotiated with Microsoft (both DOJ and EC) are not likely to be too burdensome for the company, and will be merely a slap on the wrist. Microsoft had already stopped doing much of what the government had originally claimed. It is still too early to guess the exact terms of the remedy, so maybe the market just wants to take a "wait and see" attitude. Or maybe the weakness in demand is such an overwhelming negative that NOTHING can compare to it.
As far as a "test" of the April Nasdaq low, we're essentially there, or close enough. We're only 86.06 points (5%) from the low of 1619.58 as of Thursday's close. Nasdaq could keep grinding lower for the next two months based on short-term business fundamentals, or if there is no big selling when Nasdaq gets down in the 1600 to 1650 area, traders could initiate a "technical" rally to at least temporarily take the market up a bit.
We're back to the apples and oranges comparison. Every day Wall Street "decides" whether to focus on the horrible short-term outlook (Q3 results) or to look six months out to the time when at least tepid growth is fairly likely. Right now, Wall Street is focused on the very short-term. Ultimately, that's good news for investors who are focusing on the longer-term outlook, offering us much cheaper prices than were available a couple months ago.
What kind of catalyst could really make the market take off? Advertising demand is probably the best indicator about growth of the economy. Advertising does stimulate demand. As long as companies continue to skimp on advertising, the economy will continue to be held back. But once companies start spending more ad dollars (like for the holiday season), demand could really pick up. Whether or when this catalyst actually occurs is an open question, but it would be a definite market catalyst, especially for companies like AOL (AOL) and Yahoo (YHOO).
I cheated a little on my dollar-cost averaging program and bought some more S&P Tech Sector "Spider" (XLK) LEAP call options just before the close. The price was just too irresistible. I also bought some shares of McDATA (MCDT).
I went to another Senate Budget Committee hearing on the federal budget, this time the grilling of the OMB director by the Senate. Not that much new, but it did reaffirm that the two sides are close enough that an accommodation can be made as soon as the parties finish their ritual "mating" dance. One senator referred to companies that are followed by Wall Street as not being "in the mainstream of American Business". He is partially right as there are many, many smaller and mid-size companies that are privately held and don't have to answer to Wall Street's analysts on a quarterly basis.
Jack Krupansky
Updated: September 07, 2001 08:42:06 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology