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As disappointing as it was that Nasdaq fell slightly for a second day, it's quite heartening that the market is hanging in there and resisting all attempts to sell it off in any significant way.
All of the market weakness from 11:45 a.m. to 2:45 p.m. on Friday can be attributed to day-traders shorting a lackluster, slow market. From 2:45 p.m. to the close virtually every penny of that loss came back as traders covered their short positions. In fact, right from the open, shorts attacked every rally attempt. But those rallies may have been merely bullish day-traders anyway. In any case, Friday's market belonged to the traders. Investors are sitting tight, waiting either for a buyable dip or a breakout.
It is noteworthy that more stocks rose than fell on Friday even though the Nasdaq index declined slightly. So, there was at least some buying going on. Possibly money managers were shifting from large-cap stocks that had run up to secondary issues that have more potential.
Nasdaq has now closed above its 100-day moving average for FIVE days straight. And, the 50-day moving average has turned up (because Nasdaq is now higher than it was 50 days ago).
The Consumer Price Index report for October showed that core inflation is unchanged over the preceding three months. In other words, inflation is well under control. This was a positive report. It's also good news that deflation has not reared its ugly head. The headline number showed a big decline, but that was due to the huge drop in oil prices, which may or may not stick.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) for the week ended November 9, fell slightly after rising for two weeks. This was a slight setback for the possible recovery. Still, the decline was fairly small and could well be noise. On the other hand, the six-month smoothed average of the index actually rose for the third straight week. This inconsistent performance is a minor disappointment, but par for the course in the early stages of a recovery. Overall, I'd rate this a slightly positive report since it did not show a significant decline.
The Industrial Production report for October showed another big decline. This was a negative report, but to be expected. My model for the recovery is that October 15 was the turning point for the overall economy, so there was no way October could have been positive. In any case, industrial production (only a fraction of the U.S. economy) may not start growing again for a few more months.
The National Association of Home Builders (NAHB) Housing Market Index for November actually showed an improvement from October. Traffic of potential buyers is up. Six-month expectations are up. Only current sales, unchanged, were a slight disappointment. This was a positive report. It is expected that sales will be lackluster for a couple of months and then pick up again.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 2.20% on Friday to 27.17, which is right in the middle of the moderately high anxiety zone (25 to 30). VIX was up most of the day, right from the open, until it finally fell off right before the close as the market recovered most of its losses. It is very heartening that VIX dropped despite the weakness in the overall market. This strongly suggests that people are feeling more comfortable about the economy (or at least the outlook), the "war", the plane crash, and simply the fact that the market is holding up so well.
The Nasdaq-100 After Hours Indicator gained momentum throughout the Friday evening session, closing up 3.77 points. There was no market-related news to have inspired this optimism, so possibly it was speculation that there could be good news from Afghanistan over the weekend. Or, maybe it was just euphoria that the market recovered its losses at the end of the day.
Fed Funds Futures suggest a 31% (down from 41%) chance of a quarter-point cut in interest rates at the December FOMC meeting. In other words, the bond market is saying that it is unlikely that we will have any more interest rate cuts at all. These guys really do believe the economy is on the verge of a recovery and that no additional monetary stimulus is needed.
It looks like the much-ballyhooed fiscal stimulus package is on hold until after Thanksgiving due to partisan squabbling. But, that's okay since the economy really doesn't need it anyway. But, we'll get that stimulus package by early December whether it is needed or not. Although not necessary, it will act as an insurance policy and help to build confidence for both consumers and businesses.
The media has lead us to believe that the economy is in dire straits, that people are afraid to go out in public places, and that consumers are afraid to spend money. Now, how are we supposed to believe all that when the "Harry Potter" movie rakes in a record-setting $93.5 million in its first weekend? What's wrong with this picture? I was passing by the FAO Schwarz toy store here in New York City on Sunday just at opening time and there were hundreds of people in line waiting, just to get into the store. I guess the media needs to try a little harder to get through to these irrational consumers. If this kind of thing keeps up, we might actually have a decent Christmas shopping season. The media Grinches better get busy.
Investigators may find additional anthrax letters in the congressional mail that was "sequestered" after the original Daschle letter was discovered. The market MIGHT react negatively to the discovery of the letter to Senator Leahy late Friday, but since that letter was clearly part of the original attack, there's nothing new to be anxious about. Two Senate office buildings were closed for the weekend to test their mail-sorting areas again. They may find something, but it will most probably be "medically insignificant". If the market does sell off because of one of these kinds of scares, buy the dip.
Nasdaq now has a 40-day rally under its belt. That's two months. I call that a nascent bull market. In a month I'll call it a genuine bull market. Some people will insist that Nasdaq rise above it's 200-day moving average and cause an uptrend in that average before acknowledging a trend change. Fine, but why wait? The 200-day moving average is coming down fast and now just under 2000. So, as soon as we break 2000 we'll also be above that average. But it will take a couple weeks of moderate rallying after that before the 200-day moving average finally begins to turn up. Essentially, that will be fairly close to the 3-month point anyway.
There is talk of tax-loss selling. The trouble is, a lot of the stocks that fell so hard are now rallying so strongly that it would be a real shame to sell now and miss out on the coming rally. You can't simply sell and buy right back because of the Wash Sale Rule. You have to wait 31 days. There are two ways around that rule. First, double up. Buy MORE of the stock and wait 31 days before selling the original stock. That sale needs to occur before the end of December, so buy well before the end of November (like this week). Or, sell the stock for the tax loss and immediately buy a similar stock that you think will perform as least as well as the stock that has the big tax-loss. I think the only outright tax-loss selling will be for stocks that that have little hope of ever recovering and are already so shriveled up that they won't affect the market indices anyway.
Although it's still possible we could see a significant near-term sell-off, it just seems much less likely now. Or, the sell off will come after the market rallies a fair amount more. People who are anxious to sell or want to take profits have had plenty of opportunity over the past week. What are they waiting for? I guess they're waiting for the market to rally further.
Sidelined money may be just waiting for some market weakness to buy the dip. But there just doesn't seem to be any substantial dipping. If this trading range persists long enough, that in itself will be a bullish sign as the market builds a substantial base upon which the rally can be extended.
If EVERYBODY is expecting a big dip correction, then there's a really good chance it won't happen. So many of us are living in fear of a big correction. But big corrections only occur when we're all being complacent. I think the shorts are worried that the market could rally more before any dip or that even a modest dip will be so quickly bought up that shorting on other than a day-trading basis is too risky.
Since it's Monday again, it's time for me to make my weekly dollar-cost averaging (DCA) purchase. I'm still buying January 2004 LEAP call options on the S&P 500 Tech Sector "Spider" (XLK). I aim for a strike price that's just "in the money".
This is a short week with the market closed on Thursday, Friday is a half day, and Wednesday will probably be very slow. In such a thin market, volatility can be exaggerated. With so many of the usual players off, it's impossible to know whether the remaining players are more likely to be buyers or sellers. My guess is that the diehards will be day-traders who will push the market around (both up and down), but with little net change since they tend to close their positions by the end of the day. One exception is if they can force an intra-day low that triggers tight stop-loss orders. But even then, the losses may be minimal if there are few people ready to do major selling. I'd be surprised if the market dipped over 5% (100 points) this week. The final exceptions are if there is really bad or really good news on the "war" front or there are additional terrorist attacks. Also, the market could react negatively if the final demise of the Taliban drags out for more than a few more days. But, the market could rally dramatically on a final capitulation of the Taliban. Even then, if there are only day-traders in the market, any rally will be followed by equal profit-taking and the real rally would await the return of the heavy-hitters after the holiday weekend. I'd be happy if Nasdaq fell a little, say 1.5% (28 points), this week.
The bottom line: The Fall rally is intact. A modest dip (say, 5%) is to be expected, but any significant dip should be bought.
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.
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.
Jack Krupansky
Updated: November 18, 2001 11:25:11 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology