| Read Jack's "diary" of life in Washington, DC after the terrorist attack. Click here. |
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 after mid-October when the new wave of layoffs peaks.
The net amount of selling on Monday was fairly mild compared to what it could have been. Traders may have taken heart from the way the market bounced off its low for the day without inspiring any further selling. Most of the volatility was probably just momentum day traders alternating between long and short plays. There was a noticeable upwards "tail" in the last half hour of trading that suggested short day traders closing positions. The net selling could well have been non-day momentum traders who had bought last week and dumped shares since they had no upwards momentum. Market action did not suggest any major mutual fund selling.
The National Association of Purchasing Managers (NAPM) manufacturing index fell slightly to 47.0 in September from 47.9 in August. A value below 50.0 indicates contraction, so this is a negative report. The good news is that the index is well above 43.0 which is historically the level which indicates that the overall economy is contracting. It is also ancient history. It's still too early to judge the impact of recent events. Even next month's report may be too early, but will be far more illuminating.
The Construction Spending report showed a decline in August. This was expected, but it's still a negative report. It is also ancient history.
The Personal Income report for August showed no increase in income. Growth of income has been about the only thing keeping the economy out of recession. This is a negative report. It is also ancient history.
The Semiconductor Billings report for August showed the smallest decline since December 2000. I would rate this a slightly positive report due to the trend, but recent events relegate this report to ancient history.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL 1.19% on Monday to 34.77, which is in the upper end of the high anxiety zone (30-35). That's no mean feat to pull back from well in the panic zone and all the way down through the very high anxiety zone. And today's decline on a day when the market was down. Not bad. This could be read as relief that the market did not fall apart after its first post-crisis rally. VIX opened up, trended up, and hit a high of 36.48 in the morning as a relapse of the market looked likely. But by 10:45 a.m. VIX was on a clear downtrend. Still, it wasn't until 1:30 p.m. that VIX finally was below Friday's close, but it did manage to stay there through the close.
The Nasdaq-100 After Hours Indicator took a moderately negative tone in the Monday evening session due to a few tech warnings, closing down 2.25 points. We knew they were coming. I didn't see anything worse than would be expected. There will be plenty more coming and some will be rather ugly.
The warning from Compaq (CPQ) was inevitable. No big surprise. I don't know why the market would react at all. Or, maybe people were hoping that recent events, being essentially an "act of war" might cause Compaq to bail out of the HP (HWP) merger.
Fed Funds futures "easing expectations" moved up due to weak economic data and now suggest a certainty of a quarter-point cut in interest rates at today's FOMC meeting and an 80% chance (up from 66%) of a half-point cut at the meeting. Futures now suggest a certainty of just a half-point (total) cut by the end of the year as well as a 92% chance (up from 72%) of a total of three-quarters of a point of cuts. The likely scenario is a half-point cut at the meeting and then an additional quarter-point by the end of the year.
How will the market react to the FOMC meeting and resulting rate cut? Got me. It could go any which way and all of those ways multiple times. I'd bet that the market might rally a little in "relief" that the Fed continued its aggressive rate cutting campaign. Not that that should be any surprise. Still, the market tends to get skittish when waiting for an expected event. Really, it just depends on the mood of the trading community and whether there is any forced mutual fund selling (due to redemptions) going on. We could also see a rally leading up to the FOMC announcement and then a pullback.
As usual on a Monday, I completed my latest purchase of LEAP options on the S&P 500 Tech Sector "Spider" (XLK). Each purchase is still a very small amount, hardly more than a lottery ticket. Well, maybe a few hundred lottery tickets. I'm still surprised that no in-the-money LEAP call options are available for January 2003. Very strange.
Jack Krupansky
Updated: October 01, 2001 11:21:02 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology