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The market might very well have encountered a little profit-taking on Friday even without the disappointing employment report. The good news Thursday evening from Intel (INTC), AMD (AMD), and Sun (SUNW) apparently wasn't good enough for the market. Or, maybe the market had already anticipated the news in the Wednesday rally.
Traders did make a run at testing the Nasdaq 2000 level. They managed it push Nasdaq as low as 2002 at around 2:45 p.m., but the market bounced back almost 20 points after that. They will likely make another attempt, but the simple fact that the 2000 level held on a down day is a positive sign. The 2020 level also seemed to be an important level to the traders. They did push below 2020 late in the day, but Nasdaq snapped back and a last-minute attempt to push below 2020 failed.
Market sentiment wasn't helped by Morgan Stanley's chip analyst lowering his sector weighting from overweight to underweight. Ultimately, this kind of thing doesn't change anything for the long term, but it is negative near-term news that causes traders to lighten up on chip stocks for the day.
The market may also have reacted negatively to the lack of progress in the congressional negotiations over the fiscal stimulus plan. The stimulus will happen, but the two parties have to get as much partisan mileage out of the debate as possible before they compromise.
There was some news about a filing by the States in the Microsoft (MSFT) antitrust case that requested, among other things, that Windows be "unbundled". Nothing there to get depressed about for now, but on a down day, traders will make use of news that even appears to be negative to push the stock down. Personally, I'd prefer the pieces of Windows to be unbundled to permit choice, but the end result would be for the PC venders to re-bundle all the popular stuff and Microsoft would probably pocket even more money than when they bundle so much for "free". Sounds like a win-win for everybody but Microsoft's competitors. The Senate Judiciary Committee is scheduled to have a hearing on the Microsoft case(s) on Wednesday. It may attract some additional negative attention, but there probably won't be any substantial new news there. I'll be there. It's not yet clear if Microsoft will have any witnesses.
The Employment Situation report for November was worse than many expected. This was a negative report. But it was not as bad as people are suggesting. Yes, more people lost their jobs than expected, but the rate of job loss in November was significantly lower than in October. There was also good news in the report: both hourly earnings and length of workweek increased, which means the average worker has more money to spend. One report does not establish a trend, but the direction is clear from the weekly claims reports. In any case, the sky is not falling. This report in no way undermines the economic basis for the Fall rally. But be prepared for the unemployment rate to rise for a couple more months, until output growth exceeds productivity growth.
The preliminary University of Michigan Consumer Sentiment Survey for December showed a nice improvement. This was a very positive report. Both the Present Conditions and the Expectations components of the index showed improvement. The market SHOULD have reacted more positively to this report than to the lousy employment report. The only real downside was that sentiment is still below the level in August. But we are making real progress.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) rose again. This was a very positive report. The index level is just slightly lower than for the week before September 11. The six-month smoothed growth rate is just a bit lower than for the week ended September 14.
Nasdaq has now closed above its 100-day moving average for 19 days straight, above both its 150-day and 200-day moving averages for 4 days, and above 2000 for 3 days. The 50-day moving average continues to turn up. The 100-day moving average started turning up on Tuesday. The 50-day moving average will cross above the 100-day moving average within a couple of days; this will be a bullish signal. As long as Nasdaq does not get too far above of its 9-day moving average, traders should be happy to allow it to rally. The Wednesday rally really was a little too much for the traders to swallow.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 1.75% on Friday to 24.66, which is at the upper end of the moderate anxiety zone (20 to 25). This fall in anxiety is despite the fall in the market. This suggests that people view the moderate nature of market decline as a sign that the market should be able to hang in there without a major correction. In other words, that the Fall rally is real and that Morgan Stanley's Barton Biggs is wrong about the market needing to test the lows again.
The Nasdaq-100 After Hours Indicator had a modestly positive tone for almost the entire Friday evening session, closing up 1.7 points. People may have felt the day's dip was a bit excessive.
Fed Funds Futures suggest a 100% (up from 88%) chance of a quarter-point cut in interest rates at Tuesday's FOMC meeting. There's also a 15% chance of a half-point cut or a 24% chance of a second quarter-point cut in January. 16 of the 24 primary government bond dealers polled on Friday by Reuters believe we'll get a second quarter-point in January. I think that will happen unless there is clear and convincing evidence of recovery by mid-January. The futures market is betting that we will see such signs of recovery in January. The economists have such a dismal track record in 2000 and 2001 that they can't give us a reliable forecast, so they just assume the worst.
The latest monthly GDP poll of economic forecasters by The Economist forecasts real GDP growth of only 0.6%, down from 0.8% last month. The range was 0.0 to 1.5. That seems way too low to me. But, that's okay. This is an opportunity to arbitrage the difference between conventional wisdom and personal expectations.
Although the fiscal stimulus talks are in a state of limbo, something will happen this week as soon as both parties finish milking the dispute for political posturing in preparation for the 2002 mid-term election. Something will happen, because neither side can afford to take the blame for preventing a stimulus plan.
There was an article in the Sunday New York Times about how the holiday shopping season is so much brighter than expected that there are shortages of many popular products since companies have ultra-lean inventories. This means that either consumers will end up buying the less-popular products or wait til Q1 to buy the hot items. Either way is good for the economy.
I went to the Pentagon City mall on Saturday and the store was packed. This was partially due to the weather being miserable outside. People were carrying lots of bags, so they weren't just window shopping. So far, I can't find any signs that the economy is unlikely to recover by the end of Q1.
It's Monday, so its time for me to make my latest dollar-cost averaging (DCA) purchase of S&P 500 Tech Sector "Spider" (XLK) LEAP call options. I'll probably end up buying January 2003 LEAPS with a $26 strike price.
It may seem like the market has come way too far, way too fast, but it's all relative. How much can you earn on a money market fund? Bond funds are starting to yield NEGATIVE returns. Value stocks are past their peak. Same with old economy stocks. So what's left that has the chance of showing strong fundamental gains over the coming year? Sounds like quality tech stocks to me.
The Nasdaq 2050 level may prove an elusive milestone to put behind us for more than a couple days. But that's only until some serious, sidelined money flows into the market. I'm comfortable with the idea of Nasdaq staying stuck in the 2020 to 2050 range for another week or possibly even dipping back into the 1900's before continuing the rally. That kind of base building is good for the market. But even a modest amount of money flowing into the market will push us above 2100.
Even if the market does hold up, how much higher can it realistically go in the next month? Could we see 2100? Very likely. 3000? Not likely. 2500? Slight possibility. 2250? A good chance. What then? First, it's important to recognize that there's this continual tension between those who believe that stock prices should reflect the "value" of a company and those on the sidelines who want to get in at any price (or who are already in and want to get out at any price). Value may have some slight impact on someone's desire to buy or sell a stock, but it's the law of supply and demand (balance between buyers and sellers) that will determine stock prices, not fundamental value. Whether the market rallies strongly in January and February will depend on whether businesses start to loosen the purse strings for investment in information technology and resume giving people raises and rehiring people so consumer spending can rise again. Q4 results will be rather lackluster if not ugly, but companies may start seeing some light at the end of the tunnel.
We still have the bulk of the quarterly confession period to work through. Oracle (ORCL) will be reporting results for the September to November quarter, and they're not expected to be very rosy. November and December will not have been great months for most companies, and I think the stock market knows that very well. The focus will soon become how good or bad Q1 is going to be. Unfortunately, it's still very difficult to forecast Q1 even as Q4 wraps up. All this is part of what they call the wall of worry that a bull market is supposed to climb.
The bottom line: The Fall rally (53 days old) is still intact. 7 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 (or at least 2020) 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 09, 2001 10:57:07 PM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology