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Shorts, Weapons Inspectors Running For Cover

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With the doors slamming shut on a diplomatic solution to the Iraq crisis, the final countdown towards a U.S-led invasion of the country has begun. All eyes will be focused on President Bush's speech at 8:00 EST tonight. Bush is expected to offer a final warning to Saddam Hussein that it's time to relinquish power. This may also be an effort to give members of the dictator's inner circle one last chance to stage a coup and avoid war altogether. U.N. weapons inspectors have been ordered out of the country, while most foreign embassies have called their diplomats home from Baghdad.

Last week's market rally was largely attributed to diplomatic developments that made the delay of war more likely. Now all three major indexes are moving sharply higher ahead of what appears to be imminent military action. What's driving this schizophrenic action? Overall it seems that bears are very fearful of a sudden positive news event that could add a quick 500-700 points to the Dow. Last week the shorts were concerned that a long delay in the war would boost the market. Now the exact opposite scenario has them worried. Wall Street has a keen memory of how things played out in the 1991 Gulf War, when the market rallied sharply once the bombs began dropping. Many traders are "front-running" in anticipation of a rapid U.S. victory.

It's easy to envision a late-session rally as the remaining shorts decide to throw in the towel prior to Bush's speech. However, it's highly unlikely that war will begin on Tuesday. Administration officials are pointing at a 72-hour ultimatum for Saddam to step down. This makes sense from a logistical standpoint because the U.S. wants to give inspectors, diplomats, and foreign civilians ample time to leave the area. It's also interesting to note that the March full moon beings tomorrow. A bright moon would be less than ideal for the beginning of the initial airborne campaign as thousands of smart bombs and laser- guided munitions are unloaded on Iraq. Military planners would consider it advantageous to wait for the full moon to diminish before the bombing campaign begins.

Today's total volume is quite strong and could clock in at the highest reading thus far in 2003. Up volume is beating down volume by a ratio of 8:1 on the NYSE, and 9:1 on the NASDAQ. This contrasts the internal action that was seen before the market bottomed last week, when down volume topped up volume by an astonishing 17:1 ratio. Only a handful of Dow and NASDAQ-100 components are trading in the red. Leading the NASDAQ higher is the semiconductor index, which is currently showing a 6% gain. This upward move has propelled the SOX.X above its 200-dma near 317. The bulls will now be targeting the next of resistance at 330-340. Interestingly, the index has also broken above bearish point-and-figure resistance on both the 1-box and 5-box scales. You'll recall from Jeff Bailey's 1:00 update (and this weekend's Ask the Analyst column) that the chip sector recently reversed into "bull alert" status.

P-n-F chart of SOX.X - $5 box scale:

A scan through the list of sector indices shows green across the screen with only the OSX.X (oil index) and XAU.X (gold/silver index) lagging the rally. These widespread gains have helped to push the Dow up to its 50-dma at 8098. The Industrials last traded above that moving average in mid-January. A glance at the daily chart shows additional overhead resistance at 8150-8160. Meanwhile, the NASDAQ is moving towards a test of psychological resistance at 1400.

Kent Barton

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