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Holding Morning's Gains

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The markets continue their pattern of reacting to developments overseas. The weekend ramp up in the futures market followed through on Monday morning, as the March 21 highs were challenged throughout the major indices. The SPX and OEX both soared past those highs in early trading, while the Dow fell a couple of points short. We have faded some, but still remain quite a bit higher on the day.

The morning rally faded as reports hit the wires that U.S. troops at an Iraqi military installation had been evacuated after encountering nerve gas, apparently confirming fears that there were some hidden dangers as they closed in on Baghdad. There were also reports that chemical weapons were found in Iraqi missiles, which would strengthen the U.S. argument that Saddam was planning on using these weapons militarily.

The morning rally blasted through the 200-dmas that capped last week's rallies in the major indices and also took the Nasdaq Composite through a pivotal resistance level at 1426. It reached a high of 1430, before fading. It has fallen back to 1415.

The market seems to be ignoring additional earnings warnings in the wake of the military progress. We got warnings from INFS, APD, LAD, SONE and BLC. We also got downgrades across several sectors, including semiconductors, housing and financials. Some of the more notable downgrades were to BSC, PCAR (following guidance), WDC, MXTR, KBH, THC, LLTC and MXIM.

The semiconductor sector also saw its growth estimates cut by First Albany due to concerns about the SARS virus. FA cut its growth targets from 8% to -5% and believes the virus will affect the industry more than Iraq. It said the disease will have an incremental impact over the next couple of quarters that is not comprehended in Wall Street models, noting that 79-90% off all PCs are assembled in Asia. The effect of the note was limited, however, with the SOX up 3.3%.

The bond market gave us some confirmation of the equity rally, but the ten-year yield (operating inversely to the price of the bond) stalled out at its 200-dma of 4.076%, falling in unison with the equity pullback. It did reach a high of 4.08% on the day, but it was short lived before cash began flowing back into bonds.

The oil markets, which dropped sharply in early trading, have also bounced. The May Light, Sweet Crude Oil contract (CL03K) bounced from its rising 200-dma, following an announcement that OPEC would hold an emergency meeting on April 24. The speculation is that the group will try to curtail some of the overproduction that was intended to help cover war-related shortages. That production has helped drop the price of oil over the past couple of weeks, which has also fueled the equity rally. One of the biggest factors in rising producer prices has been the cost of energy and now the expected further drop in prices from a quick victory in Iraq may not be as steep as hoped for.

All 30 Dow stocks were in the green as of 12:45, with biggest gainers being MMM +$1.70, UTX +$2.60, GM +$1.30 and BA +$1.13. Boeing (BA) is likely benefiting from both war progress and congressional approval of a war bill that includes $3 billion for the airlines.

The market pullback has found support above the 200-dmas in the Dow, SPX and OEX. Traders looking to get in long on a pullback should note that we have seen come extreme moves the past couple of Mondays following war developments over the weekend. Those moves have been somewhat corrected on Tuesday, before heading in the direction of that week's path.

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