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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.
For the second day in a row, Nasdaq popped up abve its 100-day moving average and then reteated. This is how the April/May rally ended. That's not to say that the same thing will happen this time, but short-sighted traders look at this kind of stuff to make their decisions. Hedge funds might also be using this kind of signal to sell. It does seem as though we're starting to see a bit of "sell into any rally" mentality. And not just selling long positions, but selling short as well. The key is not that this situation has occurred, but whether normal investors (who don't pay attention to "technical analysis") keep on buying. Retail investors pumped a lot of money into mutual funds over the past week, so that could help. It's actually okay if short-term investors such as hedge funds do some profit-taking, as long as there are other investors waiting to take their place. A changing of the guard is essential for any long-term rally. That was the ultimate problem with the April/May rally: it really was just an insider's game, and didn't attract very much of the average investor's money.
Nasdaq peaked just after 11:00 a.m. and then retreated a little and then was simply unable to break above the 1880 level. The last attempt was at around 1:45 p.m. and was weak enough that people just gave up on the market and Nasdaq then declined fairly steadily into the close. There may have been some serious buying earlier in the day and some retail investors suckered in during the early afternoon, but otherwise the trading pattern suggested a bunch of momentum day-traders bidding up the market and then checking out in mid-afternoon.
Some brokerage firm stock analysts seem to be recommending that clients take some profits after the run-up. Gotta collect some commissions. Other firms' analysts may soon raise their target prices and recommend that people buy the same stocks that other firms are telling you to sell now. Don't these people understand that these kind of conflicting actions may result in brokerage firms making lots more money? Gee, I wonder what their motivation could possibly be?
The Jobless Claims report for the week ended November 3 showed a significant drop in the pace of claims. This was a very good report. Initial claims were significantly lower than expected. Continuing claims grew at the slowest pace since September. And, significantly, the four-week moving average of initial claims fell slightly. We only have two weeks of improvement under our belt, but that's a whole lot better than accelerating unemployment. We have a long way to go before employment stabilizes, let alone grows again, but this data suggests we're making progress. Data can fluctuate dramatically from week to week, so we shouldn't get too exuberant just yet.
The Chain Store Sales report for October showed a significant improvement over September. Growth is still way down from historic levels, but in light of recent events, I would rate this a very positive report. Some retail sectors are having difficulty, but as long as the overall trend is up, it doesn't matter where consumers are spending that money, at least for now. Who knows, they might just be saving up for big-ticket items for Christmas.
The Import and Export Prices report for October showed significant declines in prices for both exports and imports, even if the price of oil is ignored. This is a mixed report because although lower import prices are great for keeping inflation under control, lower export prices put pressure on profits and increase the risk of further layoffs.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 1.84% on Thursday to 29.91, which is now back down at the upper end of the moderately high anxiety zone (25 to 30). VIX declined sharply from the open down to a day low of 28.27 just after 11:00 a.m. and then trended roughly up right into the close. The decline in the morning did look like a bit of a downwards spike which traders might have used as a sell signal. VIX shows lowered anxiety despite the Nasdaq decline. The Dow and S&P 500 gains were not enough to suggest that they were responsible for the VIX decline. My reading is that people are starting to get more comfortable with the way the market has held up. Sure, Nasdaq is having difficulty advancing from here, encountering what the technical analysts call "congestion", but that's par for the course and much more encouraging than a steep decline. The recent VIX action suggests that people may be starting to lean a bit more comfortably towards putting more money in the market even as some of the early, aggressive investors may be taking money out. I still want to see a couple more days go by for VIX to stabilize before drawing too firm a conclusion about anxiety.
The Nasdaq-100 After Hours Indicator kept a solid positive bias for the entire Thursday evening session, closing up 6.18 points. That's more like the old optimism. But lately we've been having trouble translating positive after-hours and pre-market action into positive action during the day. This suggests different crowds going in different directions. Kind of like an ebb tide.
NVIDIA (NVDA) seemed to be the culprit causing the evening gain by upping guidance. Presumably a lot of this is due to the launch of the Microsoft (MSFT) Xbox.
Should HP (HWP) exit the PC business? Believe it or not, that's a question that is being debated right now. Neither HP nor Compaq (CPQ) is even close to being a pure PC company, but their merger is focusing attention on how the combined company would make money and where it would lose money. Both companies make great PCs, but neither is making much if any money on them. It's difficult to imagine both companies dropping PCs, but that wouldn't be such a bad outcome. Dell (DELL) will be a winner in any case. If there's a silver lining to this much-maligned merger, it's that both companies are taking a long, hard look at what they're supposed to be doing: making money for stockholders.
Fed Funds Futures suggest a quarter-point cut in interest rates at the December FOMC meeting and NO cuts after that. Even the December cut is not a 100% done deal. The people trading Fed Funds Futures are getting more serious about thinking that the economy really could start to recover fairly soon.
AMG Data Services reported on Thursday evening that for the week ended November 7, $5.2 billion flowed INTO equity funds. That's the largest inflow since June 6. This is a BIG deal. $1.7 billion flowed INTO taxable bond funds. And $37.5 billion flowed into money market funds. Municipal bond funds also continue to report inflows. This was a very good report. Lots of money sloshing around and bond yields are low enough to make stocks look more attractive.
eBay (EBAY) says that their business is back to the level it was at before September 11. This is a good sign. The rest of the economy may take its time catching up with "the eBay sector" of the economy, but there's no denying that eBay represents the Spirit of America.
Microsoft Xbox is coming real soon. Christmas shopping starts in a couple of weeks. Nobody can forecast the economy with confidence in this kind of environment. Stock market investors will place their bets in advance, in anticipation of whatever their gut feel is. There could be a big rally leading into the start of the holiday season. And if things don't pan out, then we have a monster correction. Or, maybe things turn out better than expected and the rally REALLY takes off. No guarantees whatsoever. But I'd lean toward optimism. Also, the latest market weakness may just be a classic head-fake by the pros on Wall Street to get you guys to dump your shares out of "concern" that all your recent profits are at risk. Then the pros can buy at a cheaper price and then after the market takes off again you buy back in at a higher price which lets the pros sell at an even higher price. Quite a game (or is it a scam?). And apparently it's all legal. Including brokerage firms recommending that you take profits in stocks that have reached their target prices.
Today is a Friday with the weekend ahead of us during a "war". Short-term investors will want to reduce their exposure since anything can happen on the weekend. I'm suspecting that the sell off of the Wednesday and Thursday rallies was due to a bit of short-selling and those guys may want to buy today to close out those positions. They may try to force the market down in the early going so they have a better buying environment. No guarantees though.
I'm keeping a close eye on the "war" and there seem to be a number of positive, if small, developments that suggest that progress is being made. Or at least that the military planners are getting a better handle on the situation. But it is very possible that there could be additional terrorist attacks at any time. There's also the possibility of significant false alarms. And there are plenty of garden-variety nuts around who could take actions which could cause panics. My advice: we should all just keep moving forward in our lives and let the authorities thoroughly investigate incidents before jumping to conclusions. Short-sighted traders in the stock market will always jump on any scare. Your best defense is to just hang in there and let the market recover from any knee-jerk reactions.
There seem to be a fair number of skeptical investors who view the lofty level of Nasdaq as an easy target. They'll do their best to pound the market down. But that's okay, because it helps to eliminate the froth which is not good for a long-term rally.
Traders will continue to test the Nasdaq 100-day moving average. They'll vary their tactics between a weak opening and a strong opening and reversing whenever volume peters out. Sidelined money will continue to watch this tug of war and begin to put more money on the table if the market holds up well in the face of the traders' assaults.
My view: The October/November rally is still intact.
Jack Krupansky
Updated: November 08, 2001 11:53:07 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology