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That was fast. Nasdaq managed to blow away its 150-day moving average, its 200-day moving average, and the 2000 level all in one day. Very impressive. It couldn't quite swallow the 2050 level, but that's forgivable.
I've been suggesting that a new bull market is indicated after three months. It could well be that some people may be using a 50-day definition (2-1/2 months). The Fall rally turned 50 days old on Tuesday.
The National Association of Purchasing Managers (NAPM) Non-Manufacturing Business Activity Index rose unexpectedly in November to a level (51.3%) which indicates that the services side of the economy may no longer be contracting. This was a very positive report. Unfortunately, a number of the components of the index still indicate contraction. 8 of the 17 industries covered by the index are still reporting decreased activity. So, yes, we still have a ways to go, but the economy is definitely improving much more rapidly than even many of the optimists had predicted. In any case, the market really liked this report.
Here's what I had written yesterday morning before the NAPM report came out: When the non-manufacturing NAPM index rises above 50, then you know there's a good chance we may be recovering out of a recession. Also, a manufacturing NAPM index under 44 indicates the overall economy is probably in recession; on Monday the index was reported as 44.5, which suggested that the overall economy may no longer be in recession.
The Oil and Gas Inventories reports for last week all showed growth in inventories of crude oil, distillates (e.g., heating oil), and gasoline. Despite the wrangling between OPEC and Russia, there's enough oil and gas out there to keep prices down.
The Mortgage Bankers Association (MBA) Mortgage Applications Survey showed mixed results for last week. Refinancing was way down, but mortgages for purchase were up strongly. But the overall level of mortgage activity is still well above the pre-September level. So, this is still a positive report.
The Chicago Fed National Activity Index (CFNAI) for October was truly horrendous. This was a very negative report, but it's such ancient history now. The market did the right thing, and ignored this report. It's a good report to show us more clearly where we've been, but not where we're going.
Outplacement firm Challenger, Gray & Christmas reported that there were fewer mass layoffs in November than October. The trend is now in our favor.
Nasdaq has now closed above its 100-day moving average for 17 days straight, and above both its 150-day and 200-day moving averages for 2 days. And finally we broke above the 2000 level with room to spare. The 50-day moving average continues to turn up. The 100-day moving average is still declining and will need a few more days of gains to begin turning up. Some traders will try to push Nasdaq as far up and as quickly as possible, even as other traders try as hard as possible to push it back down. The real question is whether we will see a steady enough stream of inflows to keep the cynics at bay.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 2.13% on Wednesday to 24.79, which is at the upper end of the moderate anxiety zone (20 to 25). VIX fell sharply to the 24 level shortly after 10:00 a.m., but then stayed fairly flat until about 3:15 p.m. when it rose a bit as the market started to see a little profit-taking. You might have expected VIX to plunge further given the strong rally, but maybe people are still just a little anxious that this is not a sustainable rally. And, a bigger drop in VIX would have caused the cynics to insist that the market was being overly complacent and then they'd start to attack it with renewed enthusiasm. For now, VIX is fine.
The Nasdaq-100 After Hours Indicator had a negative bias for the entire Wednesday evening session, closing down 1.83 points. A little profit-taking after a very strong rally is perfectly reasonable. And I'm sure there are plenty of cynics shaking their heads and muttering about Nasdaq going too far too fast.
EXFO Electro-Optical Engineering (EXFO) warned of lower revenues and larger losses in the quarter that just ended in November. Must of their business comes from telecommunications carriers. Their specialty is fiber-optics components.
Fed Funds Futures suggest a 84% (down from 96%) chance of a quarter-point cut in interest rates at next Tuesday's FOMC meeting. This means the cut is still very likely. There's no longer any chance of a second quarter-point cut at the January meeting.
Some cynics will insist that the Tuesday/Wednesday rally was just a speculative blow-off and indicates that the Fall rally is over or at least very close to being over. The answer will come when we see if sidelined money flows into the market over the next two weeks.
How likely is the rally to continue in the near-term? Very difficult to say other than it will continue until the buyers stop buying. As volume peters out, traders will begin to lose interest when the market gets too far above its 9-day moving average. But as long as money keeps flowing into the market, the traders and cynics and short-sellers will have to sit on the sidelines and watch Nasdaq soar at least a little.
The bottom line: The Fall rally (51 days old) is still intact. 9 more days of Nasdaq above its 50-day moving average and I'll "officially" label it a genuine bull market. I'd also like to see Nasdaq above 2050 for at least a week before blessing the new bull. A modest dip (say, 5%) is to be expected, but any significant dip should be bought.
Short-term economic outlook: The trough for the recession was probably the second half of October and the economy has slightly improved since, even if not yet noticeable by economists (they won't have a handle on November until January). As December and January progress we will gradually start to see more incremental signs that the economy is beginning to recover. Not a large improvement, 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. But, October and the first half of November were 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, probably late in Q1 of 2002. The manufacturing sector won't trend up from a trough until sometime in Q1.
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: December 06, 2001 12:05:58 AM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology