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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 (end of this week) when the new wave of layoffs peaks.
Gloomy economic data contributed to the initial sell-off of Nasdaq, but since pre-market trading was already to the downside, it could not have been just the economic data. And it wasn't anthrax either. I'd chalk up the initial sell-off to traders who felt the need to "test" Nasdaq since it was sitting a bit above its 50-day moving average. Nasdaq crumbled, but only until 10:30 a.m. when it stabilized and began it's steady, escalator-like climb into the close.
I'd say that the initial weakness was produced mostly by short selling. This presented a very tempting, buyable dip. That buying forced the shorts to buy to close their positions. The speed with which the shorts threw in the towel seemed to have enticed a bit of sidelined money as well. As negative as the initial selling was, it petered out too quickly and suggested that the short sellers lacked real conviction. That lack of conviction inspired the "real" buyers.
The advance report on Durable Goods Orders for September showed a steep decline. This was a negative report, but September is ancient history now. The decline was steeper than expected, but nobody really knew exactly what to expect anyway.
The Employment Cost Index for Q3 was a slight bit higher than expected. This was a neutral report. Labor costs are well enough under control that the Fed does not need to worry about inflation, for now.
The Existing Home Sales report for September showed a dramatic drop in sales. This was a very negative report, but home sales were expected to drop even before the events of 9-11.
The Jobless Claims report for last week showed a slight increase in both Initial Claims and Continuing Claims. This was a negative report. I was expecting that the Initial Claims rate would have stabilized by this week. But since the previous week had showed a large drop from the week before that, it may just be that the data is a bit "lumpy". Or, maybe it will take a little longer to see stabilization in the pace of layoffs.
The Conference Board Help Wanted Index for September fell to a new low. This is a very negative report, but I wouldn't read too much into it since we're almost a month past September. In fact I'd give the October report a low weighting also. The November report will give us a much clearer picture of how the "recovery" from 9-11 is going.
Overall, the economic data was rather gloomy yesterday. But people were willing to look beyond the short-term "bad apples" and focus instead on the longer-term "sunny oranges" that are being increasingly expected in six months.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL 4.59% on Wednesday to 31.36, which is now in the lower half of the high anxiety zone (30 to 35). VIX rose sharply at the open and peaked at 10:30 a.m. as Nasdaq hit its bottom for the day. VIX did pull back a little as Nasdaq started to recover, but only a little. VIX stayed elevated until 1:00 p.m. when it began a steady fall into the close as the strength of the market rally became quite clear. Actually, it wasn't until 2:45 p.m. that VIX was finally below Tuesday's close. That's how unwilling people are to believe that all the recent rallying is real. Or maybe its just a "crisis premium" due to 9-11, anthrax, the "war", and the prospect of additional attacks.
The Nasdaq-100 After Hours Indicator took on a very negative bias early in the Thursday evening session and closed down 13.91 points. Quarterly reports were not much worse than other days, so I suspect that people decided to do some profit taking since they have trouble believing that yesterday's addition to the rally is simply not going to be durable. I have noticed recently that the after-hours and pre-market action doesn't seem to correlate very well with the action the next day. Usually there is some amount of correlation. This suggests that there really is a "sea change" going on and the two "crowds" are developing divergent views, with one crowd focusing on the short-term "bad apples" and the other crowed focusing on the longer-term "sunny oranges".
Fed Funds Futures continue to suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting. There is also now a 50% chance of a HALF-POINT cut at the November meeting.
AMG Data Services reported Thursday evening that for the week ended Wednesday, October 24, $3.4 billion flowed OUT of equity funds. Half of that was from international funds. Even so, the outflows from domestic funds are not a good sign. This suggests that a fair amount of the recent rally may be due to hedge funds and institutional investors. Or, maybe independent retail investors (like us) are beginning to "take control" of the market. It's probably a combination of all of the above. AMG also reported that $1.8 billion flowed INTO taxable bond funds and $8.2 billion flowed INTO money market funds.
I'm not sure what to think about the impending "fiscal stimulus" package being concocted by Congress. Other than that SOMETHING will emerge. The exact or even general composition of the package is uncertain. The amount is also uncertain. But the biggest problems are that it isn't clear how much of the stimulus will have an IMMEDIATE impact and what portions of the stimulus may actually CAUSE longer term problems. Stimulus that merely pulls longer term demand into the short term could leave the economy "short" further out. The package is supposed to cover an entire year when it's not clear we even need ANY stimulus in even Q2 of 2002. This may be just another example of why it's best for the government to refrain from manipulating the economy. In any case, the market MAY consider the fiscal stimulus as a short-term plus since it helps to improve "confidence" by assuring consumers and businesses that there will be a little extra money in their pockets in coming months.
Last night I went to a nice, fairly pricey restaurant here in New York City and it was very busy. And there was so much traffic on the streets. The economy does seem to be picking up, from what I can actually see.
I usually don't like to engage in "trading" or buying solely based on "market action", but yesterday I could see before the open that traders were going after Nasdaq to "test" its breech of its 50-day moving average. Pre-market futures were down sharply even before any of the economic data came out. I don't like sitting and watching the market, so I waited until shortly before 10:00 a.m. to give the market a chance to settle. When Nasdaq was down 25 points I bough some LEAP options on the Nasdaq-100 Index Tracking Stock (QQQ). I waited a little while and at 10:30 a.m. bought some more when Nasdaq was down 45 points. That was enough for me and I logged off. I didn't even wait to see Nasdaq start to recover. Usually, unless I'm executing a trade, I NEVER watch the market while it's open. I spend a couple hours digesting news before the open and do the same after the close. I plan on hanging onto these LEAPS for a while. I'm not into short-term trading. I just like to take advantage of opportunities when they present themselves.
I'm not sure what's next for this market. The bears and cynics will continually try to "test" the market. But any lack of conviction on their part will just result in more days like yesterday.
Today is a Friday and a "war" is going on, so short-term traders will tend to close out positions since ANYTHING can happen on a weekend. There might be a significant number of short sellers who will buy because they are getting desperate and fear that something "good" might happen on the weekend. And maybe a lot of the buying this week was by short-term traders who will sell to "take some profits" because they don't want to risk that something "bad" might happen on the weekend. I'd lean towards the market creeping up a bit more, unless there's some fairly bad anthrax news.
Jack Krupansky
Updated: October 26, 2001 12:52:58 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology