| 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.
I would not rate the Thursday market action as a sterling example of "follow-through". Yeah, we got a nice little 1% gain on Nasdaq, but that is WAY OFF the high for the day. My reading is that momentum traders decided to play the upside and in the afternoon they decided it was time to take their profits. The net gain represented a few "suckers" lured into the "game" by the "action". Another possibility is that there really was some serious buying, but the cynical traders did their best to "sell the rally". We're right back to the same question for today: Will there be any follow-through.
Dell Computer (DELL) reaffirmed its quarterly guidance and that was enough to instigate a little exuberance. But clearly that was not enough to sustain a big rally. Or, maybe it was, and there was just too much "sell any rally" cynicism. As hard as it is to start a rally, it's far more important to have plenty of buying for the rally to sustain itself for more than a few hours.
The Jobless Claims report for last week showed, as expected, a surge of both new and continuing claims. This is a very negative report and worse than expected. Still, the sooner we get the new wave of layoffs behind us, the sooner the weekly reports will begin to trend back down. The bulk of the layoffs inspired by recent events will be behind us a couple weeks from now.
We are probably in a recession right now, but past recessions may not prove to be a very useful guide for this one. My bet is that it ends up being a rather short one given that so many positive forces are at work.
The Factory Orders report for August came in flat rather than an expected decline. This is ancient history now. But it's still a positive report.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE 3.38% on Thursday to 34.22, which is still in the upper end of the high anxiety zone. Even when the market peaked at 1:15 p.m., VIX was still only slightly lower than Wednesday's close. In fact, VIX was above the Wednesday close all day except from 12:40 p.m. to 1:20 p.m. Basically, the "pros" are worried that the recent market rise won't hold and the market is likely to fall further. They express this worry by bidding up "put" options on the S&P 100 futures to give them a gain if the market does fall. In any case, the VIX action yesterday was not a good sign. That's not a guarantee the market will decline, just an extreme lack of confidence that the market is truly "off to the races".
The Nasdaq-100 After Hours Indicator started out the Thursday evening session with a mildly positive bias but reversed and closed down 1.66 points. Despite the slight rise of Nasdaq during the day, there just was not any real enthusiasm after Nasdaq headed steadily down after its early afternoon peak. More warnings continue to flow in, but nothing major came out last night.
AMG Data Services reported Thursday evening that for the week ended October 3, $1.6 billion flowed INTO equity funds. Half of that flowed INTO aggressive growth funds. This is rather reassuring compared to the outflows of recent weeks (and months). SOMEBODY is optimistic. $1.2 billion flowed INTO taxable bond funds. $1.0 billion flowed INTO municipal bond funds, the largest inflow in over two years. An amazing $25.4 billion flowed INTO money market funds. There is plenty of cash out there just waiting for somebody to say "Go!".
Fed Funds futures suggest a 100% certainty (up from 90%) of a quarter-point cut in interest rates at the November 6 FOMC meeting and a 44% chance (up from 40%) of another quarter-point cut in December. The likely scenario is a quarter-point cut at the November meeting and then no additional cuts unless the economy deteriorates further than already expected.
Since today is a Friday and ANYTHING can happen on the weekend (remember, there is a "war" going on), short-term traders will tend to dump their positions. The close today will "clarify" whether the current market levels are based on short-term speculation (both short and long) or some new longer-term "investors".
Despite the mediocre rally on Thursday, the simple reality of two days of rallying could inspire some sidelined money to "test the waters". I'd bet on a rally of some sort unless some really bad news hits. No guarantee, but there's a good possibility.
Don't panic every time you hear a mention of "Anthrax". The bacterium is very common in nature, in soil, especially around animals and livestock. It's rare that a human contracts it, but it does happen. Yesterday just proved the point that you should never jump to a conclusion just because the media mentions something. But in the financial markets the name of the game is always "Shoot [Sell] first, ask questions later". Bio-terrorism (and chemical) IS a real threat, but has been for years now. Unfortunately, you can't expect the media to give you a reasonable "risk" assessment. Even if/when it does happen, the best thing to do is stay calm. Getting all excited will not help anyone. Most of these threats would tend to dissipate rather quickly.
The explosion of a Siberian Air Lines jet had a similar moral. People instantly began making assumptions about terrorism, but the current theory is far different. You would have thought that we could have learned from TWA Flight 800, but clearly we haven't learned much, if anything. The real bottom line is that a calm, dispassionate investor can ride through these turbulent moments without the gut-wrenching anxiety that plagues mere traders. And whenever the market does something truly stupid, the shrewd investor can be there to offer "liquidity" (and a little sanity) AND be amply rewarded.
Jack Krupansky
Updated: October 05, 2001 01:00:39 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology