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Markets Flattening Out Ahead Of Iraq Deadline

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Last week stocks rallied sharply on speculation that the U.S. would romp to an easy victory in the upcoming war with Iraq. So far all indications are pointing towards a quick resolution - at least in the early going. Reports of Iraqi troops surrendering are picking up, with Fox News reporting this afternoon that 17 soldiers surrendered at the Kuwaiti border. The white flags are expected to be out in force once the actual hostilities begin, because Saddam Hussein has pulled his more well-equipped and loyal troops back to Baghdad.

How might a trader apply this knowledge? Well, we know that the attack will most certainly begin after dusk falls in the Middle East in order to give the initial aerial campaign the cover of darkness. New York is eight hours behind Baghdad. Thus, an attack that began at 10:00 PM in Iraq would start at 2:00 PM EST, just in time for the final two hours of the U.S trading day. So rather than the market gapping up or down in reaction to overnight events, we'll probably be seeing Wall Street's reaction as the first bombs begin to fall. How will the market react if CNBC breaks in with footage of infrared cameras capturing anti- aircraft fire over Baghdad as the aerial campaign is unleashed?

The market is anticipating this event, but no one can say for sure what will happen once the shooting actually begins. An argument could be made for a "sell the news" event because stocks already rallied ahead of the war. On the other hand, early reports of a rapid U.S. advance towards Baghdad and massive Iraqi surrendering might give the bulls ammunition (no pun intended) for further equity gains. In either event, traders should be on their toes and expecting a large amount of volatility once the war kicks off. Specifically, watch for news of the war's beginning to hit the markets on Thursday and Friday, most likely between 10:00-2:00 EST. The latest reports from Kuwait have U.S. forces moving into the demilitarized zone on the border and warplanes striking short-range missile sites in the Southern no- fly zone within Iraq.

In other news today, traders are buzzing about USAI Interactive's decision to buy out the remaining shares Expedia.com (EXPE). Even prior to today's 19% gain, EXPE had already rallied more than 40% off of its October lows. This suggests that perhaps the institutional "smart money" had a hunch that the announcement was coming.

Word came from media/entertainment giant Vivendi this afternoon that Chairman/CEO Barry Diller had resigned. V ($15.16 +0.36) initially spiked lower on the news but quickly recovered and moved back into positive territory. Shares of Biotech firm Transkaryotic Therapies (TKTX, $5.45 +0.08) are also trading slightly higher after the company said it would lay off a fifth of its workforce and narrow its R&D program to focus on a very specific group of genetic diseases.

Moving into the final hour of trading, the Dow Industrials have pushed to the highs of the day. The NASDAQ is also seeing some upward action but still faces overhead resistance at 1400. The market internals reflect the pre-war uncertainty, with up volume roughly equal to down volume on the NYSE. Today's total volume on both the NYSE and NASDAQ looks to be on course to meet or slightly exceed yesterday's readings.

Kent Barton

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