The war with Iraq has entered its most crucial and uncertain phase as Coalition forces amass just outside of Baghdad. Investors seem unwilling to make any large bets with several important questions looming overhead. Will Iraq use chemical weapons if the U.S. and its allies enter the city? How much resistance will the Republican Guard offer? Is Iraqi leadership still intact? Will the Iraqi citizens view the Coalition as an occupation or liberation force?
Given that underlying uncertainty and the huge gains that the equity market has experienced over the past two weeks, bulls could be somewhat pleased that the major indexes are trading near the flat-line. The NASDAQ is holding firm just below psychological resistance at 1400 as the software, semiconductor, and networking groups all cling to small gains. A glance at the sector indexes shows a largely even split between losers and gainers, with only the FPP.X (forest/paper products) trading more than 2% from breakeven. The group is being pressured by losses in International Paper (IP), Boise Cascade (BCC), and Smurfit-Stone. IP ($35.43 -1.06) is looking particularly weak after breaking through several key moving averages.
List of sector indices:
Today's lack of movement has sent the VIX.X volatility index (32.43 -0.23) to levels not seen since late-January. There is no clear underlying support until the 30.00 region. This is a potentially bullish development. Instead of growing increasingly fearful as the war progresses, Wall Street is taking a "wait and see" approach.
Annotated daily chart - VIX.X
The recent rally was fueled by speculation that the Iraqi army would surrender en masse amid a popular uprising against Saddam Hussein. Thus far those assumptions have proven to be incorrect, but the market has nonetheless maintained the lion's share of its recent gains.
But in a reminder of just how prone Wall Street is to negative geo-political news, the Dow took a dive around 13:30 EST when trading floors were hit with a rumor that the Department of Homeland Security might raise the country's terror alert to "Red." The index quickly snapped back to its intraday trading range once it reached support in the 8180-8185 region. As for the rumor, it appears to have no validity. Perhaps some impatient bears were the source of the "news."