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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.
Short-term economic outlook: As November progresses we will gradually start to see the first signs that the economy is beginning to recover. Not a large increase, but at least the trend will not be downward. Some indicators will continue to decline, even as others begin to stabilize and some even begin rising. December will be a little better. But, October was probably bad enough that Q4 will "print" as a decline in GDP. Employment will continue to fall until GDP finally breaks above the rate of productivity growth, sometime in Q1 of 2002.
Well, I guess that was follow-through of sorts yesterday. But mostly the market was bottled up until the Fed rate cut announcement. Nasdaq spent much of the earlier part of the day struggling to break through the 1800 psychological barrier and even after the rate cut announcement that barrier caused some anxiety. In fact, the strong rally from about 2:50 p.m. through the close may have been due more to short-covering by traders who had misguidedly bet that the Fed would give us only a quarter-point.
Once again, we're back to the question of follow-through. Who wouldn't be skeptical with.
Okay, we got the preferred half-point rate cut. This won't put a lot of money in people's pockets in the near term, but it should help to improve sentiment by convincing people that the Fed is really on the case and that it might be well near impossible for the economy not to improve within six months.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by a hefty 6.54% on Tuesday to 29.85, which is just barely down in the upper end of the moderately high anxiety zone (25 to 30). VIX hasn't closed this low since very early September. This is a big improvement. All of the decline occurred after 2:30 p.m., so even the initial Fed rate cut announcement was not enough to calm the high level of anxiety. Be careful because traders sometimes use a major percentage decline in VIX as a short-term sell signal. I'd want to see VIX decline just a little further and stay down here a couple of days before getting too comfortable about the market.
The Nasdaq-100 After Hours Indicator had a nice positive bias until QUALCOMM (QCOM) rained on the parade and caused the bias to go strongly negative and close down 5.92 points. The good news is that the close was well above the low for the session. There is plenty of room for the evening sentiment to diverge from the daytime sentiment, so don't assume that last night's decline will translate into a decline today.
The QUALCOMM quarterly report was enough of a mixed bag with some accounting rule changes that I'd recommend letting the analysts sift through this stuff a lot more before drawing any firm negative conclusions. If the market knocks more than two bucks off QUALCOMM's price, I'll be a buyer, assuming the analysts don't uncover some truly horrendous problem.
Fed Funds Futures suggest a 100% chance of a quarter-point cut in interest rates at the December FOMC meeting as well as a 20% chance that the cut would be a half-point. The December cut could well be the end of the road for this rate-cutting campaign. Just the thought of that prospect could get people thinking a bit more bullishly. And when bonds stop rising due to the end of the rate cuts, bond investors will be tempted to switch back to the stock market for higher returns.
A Reuters poll showed that 23 of 24 primary bond dealers believe there will be a quarter-point cut in December. Only 12 of 24 expect another quarter-point cut in early 2002.
The split settlement in the Microsoft (MSFT) antitrust case is neither good nor bad. It's good that so many states are finally out of the picture (almost). It's not so good that the case now heads back to trial with discovery to uncover all the company's more recent embarrassing email messages. But, in the end, the litigated remedy will probably be just modestly more severe than the slap-on-the-wrist settlement the company has agreed to. In any case, interest should focus on the prospects of the economy recovering over the next six months. Oh, and don't forget that Xbox is coming out real soon. And corporate spending on IT should gradually start creeping upwards.
So, we are now into what can be called the November rally. Will it hold up or turn out to have been merely a bear market rally? Who knows. Feel free to short it if you think the bear is about to strike again. But don't blame me if the bull refuses to give up ground for more than a couple of days at a time and you get gored by that bull. Personally, I'm betting on the bull.
Nasdaq is nicely above it's 50-day moving average. In fact, the 50-day moving average is just about ready to level out (and possibly begin rising) after its long decline. But, Nasdaq is also about to bump into its 100-day moving average any day now and traders will use any weakness when that moving average is tested as an excuse to try to sell off the market. Our only protection against that possible sell off is if a fair amount of sidelined money comes into the market to keep Nasdaq's head above water even in the face of trader profit-taking. Or, after the traders succeed in an initial sell-off, the buy-on-dip crowd could well force the traders to cover short positions and keep the rally moving. In any case, the rally has a good chance of continuing as long as no major selling occurs by mutual funds or hedge funds. We should be okay as long as mutual fund investors refrain from redemptions.
Jack Krupansky
Updated: November 06, 2001 11:02:53 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology