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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 after mid-October when the new wave of layoffs peaks.
THAT was a REAL rally. It's what we've been waiting for so long: a strong day (Wednesday) followed by an even stronger day. Still, we are back to the eternal question: Will there be follow-through or was the rally mostly short-covering?
Anybody feel like arguing with the Fed (hint: "Don't fight the Fed")? Federal Reserve Bank of New York President William McDonough delivered a message for consumers: "We want the American people to do the patriotic thing: go out and spend." And if that sounded too mild, he had stronger words for "cautious" businessmen: "Even more importantly, what we need is for the business community to stop contemplating its collective navel and get busy investing." Any questions?
The Jobless Claims report for last week wasn't as bad as might have been expected. It actually showed a decline in Initial Claims, but that was more of a seasonal adjustment fluke. Continuing Claims increased by almost 100,000. Yes, this was a very negative report, but it could have been worse. I'm still expecting that by the time the report for this week comes out next Thursday, the bulk of the current wave of layoffs will be behind us.
The Chain Store Sales report for September showed a sharp drop. This was a negative report, but not unexpected.
The Import and Export Prices report for September showed a slight increase in prices for both imports and exports. This is a fairly neutral report, and is ancient history since the reporting period ended with the first week of September.
The Oil and Gas Inventories report for last week was mixed, but not too changed. I would rate it a fairly neutral report. OPEC could cut production, but there are plenty of reasons for them not to do so.
The economic data was not very positive, but the market was pleased that the reports were not worse.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL 2.60% on Thursday to 32.59, which is at almost the exact middle of the high anxiety zone. VIX fell like a rock at the open and hit a low of 31.79 shortly after 10:00 a.m., but then trended UP for the rest of the day, despite the market holding together, especially from 3:00 p.m. into the close. Just like yesterday, there seem to be a lot of people who really are not ready to believe that this rally is "real" and that further declines are in the cards. The flip side is that this is the classic "wall of worry" that a bull market "climbs". In other words, anxiety persists even as the "vanguard" is claiming territory. It's the "apples and oranges dilemma": the bears focus on the apples (short-term problems) and the bulls focus on the oranges (improvements expected in six months).
The Nasdaq-100 After Hours Indicator started out the Thursday evening session with only a slight positive bias and then exploded on better than expected quarterly reports and closed up 27.42 points. Now that's REAL optimism.
Juniper Networks (JNPR) and Network Associates (NETA) really surprised people with good quarterly results.
AMG Data Services reported Thursday evening that for the week ended Wednesday, October 10, $1.9 billion flowed OUT of equity funds with more than half coming from non-domestic funds. $1.2 billion flowed IN to taxable bond funds. $25.2 billion flowed INTO money market funds. Given the recent rally, I'm actually surprised that there were equity redemptions of this magnitude. What that suggests is that much of the rally last week may have been short covering, and buying by hedge funds and institutional investors (and a few retail non-fund investors). On the other hand, with less than $1 billion flowing out of domestic equity funds, those funds might have had plenty of cash on hand for the redemptions and used some of it to buy stock, possibly out of hope that a rising stock market would dissuade investors from further redemptions. We'll see what happens next week.
The stock market rally and better than expected quarterly reports caused Fed Funds Futures to scale back and suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting and only an 18% (down from 52%) chance of a quarter-point cut at the December 11 FOMC meeting. The likely scenario is a quarter-point cut at the November meeting and then rates will remain steady into January.
Will the rally continue? Who knows. What I do know is that I'll just keep plodding along on my dollar-cost averaging (DCA) investment plan. I would not be doing so if I thought the market was not going to rally dramatically over the next year. But I am taking the DCA approach because I don't have a handle as to the ultimate "timing" of the rally or what unexpected "events" might pop up on occasion to affect that timing.
As today is Friday, short-term traders will be reluctant to hold positions over the weekend when ANYTHING can happen. But, I suspect that shorts are a greater risk than longs. Yes, some bad things could happen, but the rally could continue on Monday as well. It would be understandable if the market took a "breather" today, but don't count on it. In this kind of market, economy, and global situation, ANYTHING is possible.
War? What war? While the President's men are off doing their thing, the best thing for the rest of us to do is what we would be doing if there was no war: life goes on.
If you're not sure what to do, heed NY Fed President McDonough's advice and go shopping!
Jack Krupansky
Updated: October 11, 2001 11:42:18 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology