| 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.
Friday's Nasdaq action seemed like a classic case of day-traders shorting the market and then having to cover their shorts to get out by the close. Mediocre economic reports and another Anthrax scare helped suppress any significant buying and encourage even more short selling. But in the end, the net change was essentially zero: no net selling and no net buying. Still, the recovery from the low of 1651 at 12:50 p.m. to close at 1703, a rise of 52 points, was rather impressive and did not suggest any real weakening of the rally potential. And, that recovery came AFTER all the buzz about Anthrax. This was not a "throw in the towel" kind of day for Nasdaq. It was as if participants were afraid to miss out on a rally next week.
Another possibility for describing the market action is that there was some serious selling early and that dip buyers came in and snapped up some "bargains". Either way, the net effect is the same: there was no net selling and the Nasdaq rally is intact.
I think the market may also have been "bored" due to the lack of any significant military action.
The Retail Sales report for September was lousy due to a combination of an already sluggish economy and the effects of the 9-11 events. This was a negative report, but was expected to be negative anyway. The market was disappointed that the drop in sales was more than expected, but that "estimate" was just a guess anyway.
The Producer Price Index rose a bit more than expected in September, but still at a slow enough pace to keep inflation under control. I rate this as a neutral report.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) was unchanged from last week’s revised level of 115.2. I consider this a positive report. It covers the week ended October 5. I had expected the WLI to decline further. Instead, it seems as if it is stabilizing sooner than expected.
The preliminary results of University of Michigan’s October Consumer Sentiment Gauge rose to 83.4 from 81.8 in September. I consider this a very positive report. Consumers rule!
Overall, Friday's economic data was close enough to the realm of reason to not warrant the market to abandon the rally.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE 11.97% on Friday to 36.49, which is now back up in the very high anxiety zone. VIX was up modestly on the open, but remained below 35 until 11:50 a.m. when the Anthrax scare caused it to jump up to just below 36. It then had a steady trend up to its day high just over 38. It then stayed fairly flat until about 3:20 p.m. when it began to fall sharply into the close. The bottom line is that many market participants are still very suspicious of this rally and are anxious to protect their gains by buying "put" options on S&P futures. The demand for those "put" options causes a rise in the volatility premium, which is what VIX measures. VIX is frequently a contrarian indicator, so higher levels can indicate that buying is being artificially pent-up and will eventually result in additional rallying.
The Nasdaq-100 After Hours Indicator had a fairly negative bias during the Friday evening session, closing down 6.95 points. There wasn't any late news to account for that shift. Maybe it was just some longs that figured the late rally during the day was short covering and they had a change of heart. This market action was a bit unusual even for this crazy market.
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.
The Microsoft (MSFT) antitrust case now moves on to the next stage: mediation. Settlement talks went nowhere and the judge's deadline, October 12, has passed. Now, the parties have agreed on a mediator and the judge has approved. The mediation phase will last until November 2. If mediation does not produce a settlement, the case moves on to discovery and depositions in preparation for courtroom proceedings on March 11. Nobody really expects a settlement, but one of the parties could decide they would rather settle and be done with it. Mostly, the talks are likely to just be posturing and trying to paint the other side as being inflexible. Just because the parties agreed on a mediator does not mean that they believe mediation will lead to a settlement. By agreeing to a mediator with unimpeachable credentials, each party can say they acted in good faith even if the mediation fails. Unless there is a settlement, there won't be anything actionable for investors until March 11. For the record, none of the "restrictions" being proposed by the government will really have a significant negative impact on the business potential of the company, despite protestations to the contrary by Microsoft. Current weakness in the overall economy, the PC sector in particular, and capital spending in general are far more significant than even a worst-case scenario for the trial.
Since it's Monday, it is once again time for me to make my weekly dollar-cost averaging purchase of January 2003 LEAP call options on the S&P 500 Tech Sector "Spider" (XLK). The market has moved up enough that I may finally be able to buy an option that is "in the money" ("strike" price less than the stock price). There was a lot of action in this option on Friday and its price moved up even though the price of XLK fell. That's just the kind of quirky behavior options traders have to live with.
Will the rally continue or will it "retrace" and result in yet another test of the low? It simply depends on whether the balance between buyers and sellers favors buying. It has little to do with economic fundamentals or "valuations". It's simply a matter of supply and demand. If demand for stock is there, the rally can continue.
It's also the "apples and oranges dilemma". If the market focuses on lousy short-term fundamentals (apples), the rally will falter. But if the market focuses on the sunny six-month outlook (oranges), the rally could strengthen. On any given day, there is a tense tug-of-war between the "apples" camp and the "oranges" camp.
And what should you do if you bought stock recently and are worried that the rally will evaporate and take away all your gains? Tough call. That's for YOU to decide. Seriously, the market works best for all of us if we each independently make our own decisions. The market is the sum of all of our actions.
You could "write" some "call" options on your stock (one "contract" for each 100 shares) and pocket the premium, but then you lose out on any further gains. Actually, if you write an "out-of-the-money" option you get a smaller premium but more of any gain. But writing call options does not protect you from downside. You can buy a "put" options to protect your profit and even gain from a decline, but that's an extra cost.
Me, personally, I'll just grin and bear it and hold on to the stock I have as it goes up and down while I wait for the longer term rally. Dollar-cost averaging is another solution to the "market timing" problem.
The Anthrax "scare" may well continue for some time, but it was heartening to see how well the market recovered on Friday. As scary as "bio-terrorism" is, market participants now have direct evidence of how difficult it is to turn bio into a major threat. And, as sloppy as the initial response by authorities was, they were in fact able to get their act together reasonably well.
The "war on international terrorism" will continue to evolve, literally, on a day-to-day basis. That's frustrating, but about what should be expected given the nature of the threat. I would personally recommend that everyone give the administration six months to get its act together and pull off this part of the "campaign". They're still not sure what to do about Iraq (or Iran, for that matter), but, as I said, all of this is evolving. It's best for everyone to just try to be patient for those six months. Don't "dig in" and hide in a foxhole, but do your best to live as normal a life as possible. We can all be critical of the "handling" of this "war" (especially me), but we can still support it as well.
Jack Krupansky
Updated: October 14, 2001 11:36:43 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology