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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.
Current short-term economic outlook: Recent events will cause a sharp drop in economic activity, but those effects may be short-lived as pent-up demand needs to be satisfied. The economy will be completely up in the air until mid-October. November and December may show the beginnings of recovery, but only to the extent that the "response" to terrorism does not continue to drag down the economy. To get the "pulse" of the economy, focus on employment, income, and advertising spending. The government issues unemployment numbers every Thursday. But, don't waste time with these numbers until about mid-October after the new wave of layoffs subsides.
Looking at the Friday market action, clearly, the market is struggling to find its feet. But the relatively narrow trading range between 11:00 a.m. and the close was very encouraging.
According to Reuters, Life insurer MetLife (MET) bought $1 billion in a wide range of U.S. stocks on Friday, part of a long-term plan to build up its equity holdings. MetLife CEO Robert Benmosche said that they are "making this strong move today because we have enormous confidence in our country and its economy." Insurance companies are not known for "bold moves" in the stock market.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 3.59% on Friday to 47.28, which is a relief, but still was up there in the panic zone. VIX opened way up at 57.31, but quickly started to fall back just before 10:00 a.m as the market seemed as if it wanted to recover (possibly this is where MetLife was doing some of its buying). But just at 10:00 VIX suddenly leaped back up near 57 as it looked like the market was going to falter again. But by 10:15 VIX started to fall again (down to 51) as the market rallied. But that rally broke sharply around 10:45 and VIX climbed again with a little spike to 54 just after noon. VIX then trailed off all the way into the close (that's good news) as the market recovered a little and stayed in a narrow "trading range". Even a low-point in the market just after 3:00 p.m. failed to cause VIX to rise much at all. Despite the market being down for the day, the decline in VIX is a very good sign. Obviously somebody was doing a lot of selling, but VIX suggests an improvement in market confidence. Some people considered VIX "spiking" at the open as a kind of "capitulation". But whether the market has finally reached a bottom or MetLife's buying gave the market a temporary bottom remains to be seen. In any case, the market action after 10:15 a.m. until the close was fairly decent. But please note that we won't know that this low point represented a true capitulation until (non-market) "news" turns positive enough that people begin to feel more positive (i.e., relief that the worst really is over).
The Nasdaq-100 After Hours Indicator had no clear bias (up 9 points at one point) in the Friday evening session and closed down 0.99 points. A clear mix of both optimism and pessimism. Basically, uncertainty as to whether the market action during the day was really a stabilization.
Fed Funds futures responded to the continued decline in stocks and once again suggest a certainty of a half-point cut in interest rates at the October 2 FOMC meeting as well as a 12% chance of a three-quarter-point cut at the meeting. Futures also suggest an 88% chance of three-quarters of a point (total) cut by the end of the year. The likely scenario is a half-point cut at the October FOMC meeting and then an additional quarter-point by the end of the year.
With Nasdaq down AGAIN on Friday, I once again could not resist buying another small position of LEAP call options on the S&P 500 Tech Sector "Spider" (XLK). They STILL don't have in-the-money strike prices available.
What is "The Message of the Market" last week? Simple: "It's the Economy, Stupid!". Upcoming news about various and sundry military/diplomatic "activities" will tweak the market on occasion, but it's the economic outlook that is so worrisome to the market. Terrorism won't be completely eradicated in our lifetimes (even if the immediate al Qaeda threat is suppressed), so get used to it and move on. The President is absolutely right about one think and that's that we should all be getting on with our lives. People were absolutely mesmerized by the visual display of recent "events", but Americans will shortly do what modern Americans always do: get bored and then be ready to move on. There is always the chance of additional terrorist attacks, but the same chances were there and highlighted by numerous blue-ribbon panels long before these latest events. The market will do what it always does and "discount" the risks of the coming business environment. The President is on the case, saying that it is his primary "focus". We all need to let him do his job and we should do our jobs and get on with our lives.
The cover of a popular weekly investment newspaper says "It's Time to BUY STOCKS". There could well be a short-term response to that suggestion. Whether it turns into a longer-term rally is another story. Many cynics will use any short-term rally simply as a "sell any rally" opportunity to dump more stocks.
The technical analysts may consider the market to be "oversold", but that does not mean that retail mutual fund investors are ready to begin moving money from bond funds to stocks. The apparent "spike" in VIX may inspire some short-term "reallocation" of institutional assets, but whether retail investors also begin to "bite" is debatable. In any case, when they do, it will be readily apparent in the market indices.
It's Monday, so it's time for my next dollar-cost averaging (DCA) purchase. I hope the market doesn't rally too much today so I can get a low price. I usually wait until the morning is over so that any excess in Monday morning euphoria has a chance to dissipate.
On Friday I once again bought some more LEAP call options (January 2003) on the S&P 500 Tech Sector "Spider" (XLK). This is separate from my DCA investment program. The market could well move lower in the near term, but I'd just as soon "take a flyer" (in a fairly modest manner) and "bet" that there has been more panic in the past few weeks than was warranted. At the same time, it is always good to keep some assets in reserve to deal with all manner of unexpected events.
Jack Krupansky
Updated: September 25, 2001 08:15:54 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology