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Nasdaq reached it's closing level by 9:40 a.m. That's just ten minutes. The entire rest of the day was a complete exercise in futility. Mostly just day-traders running Nasdaq up and down. People were not comfortable seeing Nasdaq above 2000, and for four hours they were able to push it back below that level. But, in the end, the cynics lost out.
It was nice to have the gain and nice to see 2000 again, but the market action was not very confident. It was about what you'd expect during a pre-holiday week.
The Housing Starts report for November was very strong and well above expectations. This was a very positive report. Permits and Starts were both up. But completions were down.
Nasdaq has now closed above its 100-day moving average for 25 days straight, above its 200-day moving averages for 10 days, and we're back above the magic 2000 level. We're above everything out through the 226-day moving average. The 50-day moving average continues to rise. The 100-day moving average is almost flat and the 50-day moving average recently crossed above it; this sometimes suggests that a rally could be imminent.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL by 5.11% on Tuesday to 24.13, which is in the high end of the moderate anxiety zone (20 to 25). This is a significant decline in anxiety. People are starting to feel more confident about the outlook for 2002. VIX dropped right at the open and then stayed in a range for most of the day before dropping further at 3:00 p.m. But, VIX may have fallen a bit too quickly for the tastes of some technical strategists and this new-found complacency MIGHT induce a little more profit-taking.
The Nasdaq-100 After Hours Indicator started the Tuesday evening session with a slight negative tone. but promptly went deep south on a couple of big tech warnings, closing down 13.17 points. But, the daytime market action is frequently different from the after-hours action.
Micron (MU) missed earnings and revenue expectations and didn't have much much good news for the market about the coming quarter which is seasonally weaker anyway. The only really good news is that Micron and Toshiba are doing some kind of deal and also a deal with Hynix is possible. These deals will reduce oversupply in the DRAM industry. The ongoing saga of the DRAM business is well known, so more bad news from them shouldn't have a major impact on the rest of the tech sector. But, traders do like to run with any kind of bad news.
Motorola (MOT) reaffirmed guidance for Q4, but warned for Q1. The also announced more layoffs, but spread over the coming year. Yes, this was bad news, but Motorola is another one of those companies that was in the dog house anyway. They did say they expected to come close to consensus earnings expectations for 2002, so that might be considered good news.
TriQuint (TQNT) warned for both Q4 and Q1.
The only really good news was 3com (COMS) beating both earnings and revenue expectations. But the stock had been rallying recently, so it might not get a pop out of the good news.
Fed Funds Futures suggest a 26% (up from 20%) chance of a quarter-point cut in interest rates at the January 30 FOMC meeting. In other words, another rate cut is UNLIKELY unless the economy does worse than looks likely. The bond market is reasonably convinced that the recovery is a done deal. I expect the stock market will realize the same, real soon.
My view of the tech sector is that it will limp along until the old economy companies recover enough to raise their tech spending. Old economy companies have already started to raise their Q1 outlooks. But I also believe that companies need to acquire additional technology to streamline their operations to enhance profits. Both paths will lead to rising revenue for tech companies. And rising revenue leads to rising earnings. It does not surprise me that Q1 will be a real challenge for many tech companies. That said, many (but not all) tech companies will see SOME improvement in Q1. Q2 is where they'll really start to see significant improvement. Don't forget that the stock market tends to anticipate the economy by six months or more.
We'll have to see how the market reacts to the Tuesday evening bad news. It could sell off, but it could also rally in relief that it wasn't even worse. Besides, none of the companies with bad news was in the top-performing tier anyway. DRAM and cell phones are still dicey markets. Also, the direction of the market will hinge somewhat on the early-morning analyst reviews of the Tuesday evening company news. They might say it was all within the realm of expectations, or they might say it's new and noteworthy (and maybe even nasty).
The market will continue to be volatile as can be expected in a relatively slow pre-holiday week. The open question is how much money may flow into the market in anticipation of whatever rally might come in January. But then we might also see a little more tax-loss selling.
In any case, the market could be very ugly, or come through like a champ. It's that kind of uncertainty that makes the market so interesting. If you're a long-term, buy-and-hold investor, you get to ignore all this, unless you want to buy the dips. And if you're a short-term trader, you get to play the volatility. Something for everyone.
Today will be the classic apples and oranges comparison and struggle: whether the market focuses on the short-term bad (apples) news or the sunny (oranges) six-month outlook. The market SHOULD focus on the latter, but sometimes the market does not act rationally. I'd say there's a 60% chance the market acts rationally (rallies) and a 40% chance it acts irrationally (dips).
The bottom line: The new bull market (61 days old) continues. I don't expect much of a dip (3%, if at all) until after we've rallied well above 2100.
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 19, 2001 12:20:02 AM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology