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Reality Bites

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Shorts were running for the exits last Friday ahead of what promised to be a very encouraging weekend for Coalition forces in Iraq. With things going very well in the initial days of the war and rumors of surrender talks with high-level officials in Baghdad, some observers were speculating that Iraq would capitulate faster than anyone had expected. Unfortunately the reality of the situation has made those expectations seem wildly optimistic. This weekend's heated battles, Coalition casualties, and capture of several American soldiers, have nervous bulls wondering if they may have jumped the gun.

From a technical perspective, it's certainly not surprising to see some extensive profit-taking following a 1100-point rally in the Dow. The index has rolled over from its 200-EMA, which also acted as resistance in late-November and mid-January. Every Dow component is currently trading in the red. Leading the Industrials lower are DIS (-6.4%), HPQ (-5.7%), HD (-5.0%), AA (-4.4%), and HON (-5.4%). Honeywell is underperforming the DFX.X defense index, which is showing relative strength amid speculation that a longer war would equate to more contracts for companies such as LMT and ATK. Meanwhile, Home Depot is being pressured by concerns that the retail giant will miss earnings for the first quarter. Analysts, on average, are expecting a Q1 result of 36 cents per share.

The market weakness has lifted the volatility index (VIX.X) from the 200-dma near 33.75. It's interesting to see that for all of last week's explosive gains, the VIX continued to trade in the 34-36 range. The indicator did spike down on Friday, but only briefly moved below the relative low of 32.98.

Annotated daily chart - VIX.X:

Both the Dow and NASDAQ have started to firm up over the past 45 minutes after halting a steady march lower. But save for the XAU.X gold/silver index, every gauge of sector performance is currently trading in the red. As you might expect on a day when the market is selling off to this extent, the market internals are looking decidedly weak. As of 2:45 EST, down volume was beating up volume by a stunning 18:1 ratio on the Big Board and 10:1 on the NASDAQ. This one-sided action was last seen on March 12th, just prior to the explosive equity rally. Late-breaking news has Iraqi TV showing pictures of a captured Apache helicopter. There are also reports that Kuwaiti police discovered a suitcase bomb in a car. These developments are going to make it difficult for the bulls to muster any sort of convincing rally during the final hour of trading.

Kent Barton

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