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Market Wrap

Preemptive Strike?

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       WE 01-17        WE 01-10        WE 01-03
DOW     8131.01 -455.73 8586.74 -198.21 8784.95 +183.26 +297.91 
Nasdaq  1342.14 - 34.06 1376.20 - 71.55 1447.75 + 60.67 + 38.62
S&P-100  436.14 - 21.22  457.36 - 13.05  470.41 + 11.21 + 16.14 
S&P-500  861.40 - 40.38  901.78 - 25.79  927.57 +165.21 + 33.17 
W5000   8175.74 -354.59 8530.33 -228.10 8758.43 +165.21 +287.59 
RUT      375.06 - 13.04  388.10 -  8.34  396.44 +  6.13 +  6.15 
TRAN    2163.33 -181.20 2344.53 - 49.14 2393.67 + 28.73 + 73.28 
VIX       35.77 +  7.09   28.68 +  1.55   27.13 -  0.85 -  6.17 
VXN       45.05 +  2.21   42.84 +  0.56   42.28 -  3.43 -  1.00 
TRIN       1.69            1.60            0.80            1.32 
Put/Call   0.83            0.83            0.75            0.76 

Preemptive Strike?
By Jim Brown

Investors took the governments advice and fled to safety on Friday. The U.S. government sent a message to embassies and consulates around the world warning them to tell U.S. citizens to be ready to leave foreign countries on short notice. Investors heard the message and left the markets instead. It may not have been a smart bomb delivered by a B2 but the damage to the market internals was just as severe.

Dow Chart

Nasdaq Chart - Daily

It was an ugly day and it started overseas. The London FTSE closed down for the tenth consecutive day breaking records dating back to the beginning of the index. The -370 point ten day loss was nearly a -10% drop and took the index to a seven year low. The selling was wide spread with only 10 of the 42 major world markets posting gains. The countdown to the war is producing a growing feeling of uneasiness on a global level.

Feelings in other countries are polarizing and riots and demonstrations are growing. The warning for U.S. citizens to prepare to leave foreign countries on short notice was just another visible indication that the fuse on this powder keg is growing short. The state dept issued the warning due to feared retaliation and terrorist attacks against U.S. citizens and interests around the world.

There was minimal stock news to power the market and all eyes were on the numerous press conferences and news channels along with a rumor mill that was running full speed. One of the major events of the day was the U.S. claim that Saddam was going to blow up his own oil fields when the attack began. Traders worried that a further reduction of global oil production by another -3%, which is Iraq's contribution, would drive prices up yet again. Expectations of +$2.00 gas were being fielded by petroleum analysts. Worse than that there was rumors that he was going to use "dirty" radiation bombs which would prevent a quick repair. While this is probably a rumor started by traders long oil and gold futures it was still a widespread rumor.

The BBC reported that Iraqi soldiers and emergency personnel were being issued Nuclear/Biological/Chemical protection suits and crash instructions for their use. Japan issued orders for all Japanese nationals to be out of Iraq by next Wednesday. Syria issued orders to close its diplomatic offices in Iraq by Feb-15th. The U.S. issued orders to deploy another 20,000 troops to the Gulf.

The press constantly replayed the tape of the Iraq minister saying the inspectors could not talk to scientists. Iraq says they asked all the scientists to talk freely to the inspectors and all the scientists refused. Sure, and I am looking for a bridge to buy too. Do you think the threat of death if they talked influenced their decision? One of Saddam's sons said on TV that should the U.S. attack they would retaliate in the U.S. and Americans would think that 9/11 was a picnic compared to the destruction they would cause. We all remember the "mother of all battles" comments from the last war and days after days of idle threats for political gain. However, after 9/11 proved how easy it is to attack America we can no longer shrug them off so easily.

There was also several reports that Syria had taken delivery of tons of chemical and biological weapons and was storing them in Syria for Saddam. This report was covered on several different networks and was used as a further indication that he was willing to transfer or sell weapons that could be used by terrorists instead of destroy them. True or false we do not know but these rumors were the driving force behind the market on Friday.

Next week has another round of earnings with 150+ companies reporting. Unfortunately nobody is going to be paying attention to any good news. Bad news could provide additional downside pressure but good news could be ignored. The big events on the calendar look like this.

Monday: Hans Bliz reports to the UN and it is not expected to be pretty. He will have no smoking gun but according to the press he will cite numerous instances of outright lack of cooperation and blocked inspection attempts. The report will be debated by the UN Security Council on Wednesday.

Tuesday: President Bush delivers his State of the Union speech and it is sure to include a strong push for the war based on the report. The FED begins a two-day FOMC meeting on economic policy.

Wednesday: The UN Security Council begins debate on the Iraq problem. The Fed concludes it's meeting at 2:15 PM.

Friday: President Bush and British Prime Minister Tony Blair will meet on Friday at Camp David to discuss a timetable for the war.

That would be a tough week by itself but the economic calendar is also full. Monday will see Existing Home Sales again which is expected to be positive. Tuesday we see the Chain Store Sales for January, Durable Goods, Consumer Confidence and New Home Sales. Thursday has Jobless Claims, GDP, Employment Cost Index, Help Wanted Index and FOMC minutes. Friday is Personal Income/Spending, Consumer Sentiment and PMI.

The key market moving reports will be the Confidence report on Tuesday, Thursday GDP and Sentiment on Friday. With the market down and war imminent the Confidence/Sentiment reports are not going to be exciting. The GDP could be the killer. Currently "official" estimates are for +0.9% but numerous economists are already predicting in public a negative number for the 4Q. This would be very detrimental to future confidence/sentiment and the current economic climate. With all the flat to down guidance due to restrained capital spending we could see another pull back wave if businesses think another recession is already upon us. I would seriously doubt the number will be negative. Maybe I am a conspiracy theorist after all but I could see the number being estimated higher in order to protect the fragile economy for another couple of months on the premise of national security. This is a preliminary number and is mostly estimates to begin with.

This crush of coming economic news, war talk and weak earnings guidance has pushed the indexes into serious trouble. Several critical levels were breached on Friday and the Dow closed down -455 for the week. The first level breached was the December low at 8242 which held for about 12 minutes. The second level was the 50% retracement level from the October lows at 8120, which held for most of the afternoon. The Dow hit a low of 8112 in the last hour but rebounded to close just over the 50% level by +10 points. This is definitely not confidence inspiring. With more bad news ahead next week the Dow appears poised to move even closer to the October lows.

The Nasdaq only dropped -34 points for the week and is much more technically sound than the Dow. The close at 1342 is still above the December lows of 1327 and above the 100 DMA at 1334. It is however developing some strong overhead resistance beginning at 1389. The Nasdaq was the strength that kept the markets out of real trouble this week but another -20 point drop could change that picture.

Much of the selling is reported to be from Europe and Asia as traders who hoped for a quick rebound in the U.S. economy are deciding they need to cut their losses. The fall of the dollar and the weak U.S. economy along with negative feelings about the war are causing strong outflows of funds. AMG data reported a $3 billion outflow from stock funds last week. This is huge in a period normally know for an inflow of cash from retirement accounts.

Remember the January barometer? January results have a remarkable 92% record of predicting odd numbered year direction for the full year since 1937. Since the Dow is -200 points down for the year it does not look good for the home team. But then streaks are made to be broken.

For investors wanting to go long you have to ask yourself what the risks are going to be in the short term. One risk is a potential negative GDP. This could shock the markets into expecting a second recessionary dip. Another risk is that the Iraq war turns into quicksand and becomes much longer and more expensive in terms of lives and money. Fighting in sandy deserts with tanks and smart bombs is much different than house to house with rifles. Remember the battle in Mogadishu Somalia? You don't eliminate a rifle in every closet with smart bombs. Another risk is retaliation by terrorist groups or even worse alliances by major powers. With no smoking gun could Russia decide to help their business partner to solidify their position? With no smoking gun could OPEC decide to withhold oil? Will Saddam be able to follow through on his pledge to take out Israel if attacked?

Nobody knows the answer to these questions but this is what tanked the market on Friday. It was not a major earnings miss by a Dow component or a worse than expected Semiconductor book-to-bill report. It was uncertainty about geopolitical events. I had a reader cancel last week because I said something about the coming war. "Quit writing about the Iraq war and write about the markets." Unfortunately they are connected. The amount of stock news on Friday would not have taken two paragraphs and had zero impact on the market. Trust me, I would much rather be discussing the coming PC replacement cycle, predicting the bursting of the housing bubble or celebrating the passing of the new tax cut package. Unfortunately none of those have appeared and none had any impact on the market on Friday. I have been predicting this market drop for several weeks based on my economic and geopolitical view. Maybe the reader should have been paying more attention to those events.

Everyone needs to remember this is just a cycle. It is not the end of the world. The war will end and that is normally bullish for the market. The economy will recover with the Fed giving away money and that will be bullish for the market. Hopefully the market will recover before the Fed starts raising rates and that would remain bullish for housing. The key point is that this will not happen next week and probably not next month. When it does happen it could happen with a rush and there will be a lot of money to be made. Heck, there is a lot of money to be made now for traders on the downside! Chill out and just realize that the next 4-6 weeks could be rocky and plan your trading accordingly. Sit back and watch the game this weekend and worry more about excess calories than next weeks market direction. An instant on the lips, forever on the hips. Don't you wish it was that way for market profits, forever in your account? Unfortunately we have to work to make profits and then work again to keep them.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

"Every man is the architect of his own fortune."
Appius Claudius


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