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Market Wrap

War Rally?

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      03-20-2003           High     Low     Volume   Adv/Dcl
DJIA     8286.60 + 21.20  8318.81  8130.86 1.66 bln 1847/1348
NASDAQ   1402.77 +  5.70  1411.41  1371.90 1.55 bln 1760/1423
S&P 100   445.79 +  0.95   447.79   437.35   Totals 3607/2771
S&P 500   875.84 +  1.82   879.60   859.01 
W5000    8284.59 + 26.20  8314.22  8123.18
RUS 2000  370.49 +  1.98   371.27   362.64 
DJ TRANS 2170.55 + 21.40  2177.11  2117.77   
VIX        35.26 -  0.92    38.10    34.36   
VXN        48.48 +  0.28    49.57    46.75 
Total Volume 3.577B
Total UpVol  2,110B
Total DnVol  1,378M
52wk Highs  145
52wk Lows   116
TRIN       1.03
PUT/CALL   0.56


War Rally?
By Jim Brown

The great war rally sputtered to a start with about as much enthusiasm as the bombing in Baghdad. We got a couple of buying spurts intraday after bouncing back from the morning "sell the news" drop and Baghdad got a couple bombs on three buildings. The lack of shock and awe in the rally matched the lack of shock and awe in the bombing. Both started with a whimper.

Dow Chart - Daily

Nasdaq Chart - Daily

Wilshire 5000 Chart - Daily

The Jobless Claims fell slightly from 425K to 421K but the estimate was for a drop to 415K. The four-week moving average rose to 425K and continuing claims to 3.55 million. Not a great piece of economic news for any post war rally. The continuing claims rose to the highest level since November. The weak job market in February continues to get weaker in March and there is no improvement in sight.

The Conference Board Leading Indicators fell -0.4% in February and this was the first decline since September 2002. Even worse than the CBLI was the Philadelphia Fed Survey which came in at -8.0% compared to the consensus of +1.0%. This 9% difference shows how far the manufacturing sector has fallen in the last month. According to all reports activity just stopped in mid February and has not returned. New Orders fell to -4.3 from +14.1 and prices paid rose to 25.1 from 16.2. Inventories continued to fall as well as the average work week and delivery times. Excess capacity and weak demand continues to pressure the workforce and produce more layoffs. The only material improvement was the six month outlook which went from 24.7 to 46.4 solely on the hope that the Iraq war would be over and the economy would begin to recover.

The Fed minutes for the January meeting showed that the Fed expected an economic recovery soon but that the confidence in that outlook by some Fed members was wearing thin. There was increased concern that the Iraq war was not the actual problem and even after the conflict is over we could see more weakness. Considering this was at the January meeting and with the increased confusion expressed at the March meeting it appears that the frustration is continuing to build. The FOMC still felt the current stimulus in place would be enough to power the economy but was looking forward to the President's plan as well. This official view was different to the view from Greenspan when he testified before Congress after the meeting. In general the consensus was still a better economy 4-6 months out but that view was getting weaker.

The Dow managed to close positive for the seventh consecutive day but just shy of 8300. The Dow has not had a seven day streak since July 2000. The Nasdaq spent the day fighting to break and hold 1400 and despite a dip at the close it managed to close at 1402. This is a minor victory but still a victory. This comes only a day before a quadruple witching Friday with single stock futures adding to the expiration matrix.

The war rally sputtered and coughed today as it did in the futures over night. The bombs fell and so did the averages as institutions sold into every rally attempt. The selling was not strong but just strong enough to keep the markets from making any major gains. It would appear the buyers are waiting for the "shock and awe" phase of the attack to spend their money, if they have any left.

The Dow hit a high today of 8318, which just happens to be the 100DMA and strong resistance. The Nasdaq high of 1411 was just below the 200 EMA of 1415. Now let's review the circumstances. The markets have stretched their winning streak to seven days and nearly +900 points in the case of the Dow. This was in anticipation of a rally on the start of the war. The major indexes have risen to strong resistance and slowed to a crawl. The war started and despite a nice rebound from a -100 point opening dip there was no monster rally. It appears the post war rally may be a figment of the bulls imagination.

Obviously it is too soon to form that opinion but there are some other indicators to watch. The VIX fell to 35 and is not showing any real fear of a drop. Option activity is minimal and is not showing any expectations of a bounce or a dip. Yesterday we had significant put buying on the S&P-500 but today was minimal. Basically all the bets have been placed. Buyers loaded up over the last week in anticipation of a repeat of the 1991 rally and in effect pushed that rally forward in time. Even the drop in oil prices to $28 from last months near $40 level failed to spark the markets and this is a MAJOR economic plus.

I am not going out on a limb and say there is not a continuation of this rally in our near future. The shock and awe campaign is rumored to be starting tomorrow due to the final approval by Turkey to allow multiple battle groups to over fly their country. This could trigger another bout of buying but the basic problem still remains. It is the economy not the war. Yes, the fear and uncertainty of war has impacted our economy but the real problem is lack of demand, high unemployment and lack of any single factor to power a rebound. Just starting the war will not solve this. There is now a greater chance of a terrorist attack or multiple terrorist attacks. Remember, even though Osama thinks Saddam is crazy (pot calling the kettle black?) he started plotting attacks on the US when we attacked Iraq the first time. His justification was the killing of Muslims by the great satan regardless of the reason. We have even less reason this time around and the Homeland Security briefings have said they have received specific and credible intelligence of potential new attacks. (Heard that before?)

My point tonight is simple. A short war is already priced in and anything contrary to that opinion will cause bulls to exit early. The rally is priced in and lack of any continuation may cause bulls to start taking profits off the table. There are very few reasons for traders to add to long positions now. There are many reasons for traders to reduce long positions with no magic bullet taking out a certain key leader in Iraq. In short the balance of risk has shifted from the bears to the bulls. When we were at 7400 there was no future for the shorts. At 8300/1400 there is no future for the bulls without a major news event to break the status quo. I am not giving up on a war rally but I am definitely keeping my eye on the down side potential as well.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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