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Market Wrap

Bulls First to Surrender

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03-24-2003                   High    Low     Volume Advance/Decl
DJIA     8214.68 -  307.29  8514.82 8185.20   1535 mln  80/1447
NASDAQ   1369.78 -   52.06  1392.40 1368.37   1301 mln 109/1181
S&P 100   439.67 -   16.69   456.41  438.83   totals    189/2628
S&P 500   864.23 -   31.67  895.79  862.02
RUS 2000  367.25 -   8.98   376.24  366.51
DJ TRANS 2183.35 -  80.14  2263.24 2170.08
VIX        34.75 +   1.13    36.05   34.13
VIXN       46.36 +   0.58    47.34   45.32
Put/Call Ratio 0.85

Bulls First to Surrender
By Steve Price

The recent rally finally ran out of steam, as the weekend war effort brought roadblocks the market wasn't expecting. What had seemed like a cakewalk, with little Iraqi opposition, turned ugly with captured U.S. soldiers, casualties and some actual resistance on the way to Baghdad.

The expectation of a quick finish to a war that seemed on pace to end over the weekend came to a halt - as did the apparent combination of short covering ahead of a possible surrender and the euphoria over the U.S. taking full control of the oil fields - and sent the markets into reverse.

After an 1100 point gain in the Dow in the previous eight sessions, we started out the day giving back almost 300 of those points. The Dow fell back below a previous significant level of support that appeared to have been the first possible entry point at which bulls could have stepped in and bought a dip. With the recent rally taking out plenty of resistance levels and this morning's drop taking out previously significant support levels, playing the technical pivot points is becoming that much more difficult in an environment that is news driven and seems to hinge on every advancement, or lack of advancement, by U.S. troops in Iraq. By the end of the day, the Dow had dropped over 300 points and the Nasdaq Composite had given back more than 50 points.

We also saw tensions escalate between the U.S. and Russia on U.S. charges that Russia had sold weapons to Iraq in violation of U.S. sanctions. Think there may have been another reason Russia didn't want the U.S. moving into Iraq? Maybe they were afraid of what we'd find. Vladimir Putin said he would investigate the charges.

We pulled back into a pivotal 'zone' however, and how we react to that zone may determine whether this is truly a direction changing pullback, or simply a 'buy the dip' opportunity. The Dow found support in the 8200-8300 range during the formation of its head and shoulders patterns during the fall and winter, and the 440 level in the OEX served a similar purpose. Now that we are back around those levels, after soaring through them on Thursday and Friday, a bounce from here would still suggest that the rally is holding. After all, a gain of 1100 points, followed by a pullback of 300, is not necessarily bearish. However, we got a break below OEX 440 on the news of an explosion near U.S. Navy 5th fleet base in Bahrain. That dropped the broader markets through yet another level of intraday consolidation. However, once it was learned that the explosion was caused by a protestor blowing up a propane tank, the OEX quickly jumped back above that 440 level. Bulls can point to that activity as evidence that support around 440 remains solid. However, doesn't that activity show just how driven we are by news, as opposed to technical levels? By the end of the day, we ticked down to OEX 439.83, but 0.17 is not exactly a decisive violation and where we head from here on Tuesday could be crucial for the near future. A break below the 437 level would indicate that the 50% retracement of the August-October high-low range has been violated and would look bearish. We bounced from that retracement on Wednesday and Thursday, so traders can set a bearish alert on a break below OEX 437.

Chart of the OEX

Chart of the Dow

The oil market also reflected the concern that the war may not end as quickly as had been expected. Even though we got continued comments from President Bush that this invasion could take a while, oil futures had dropped 26% since March 12. The May futures fell back into a resistance zone from last fall, when the U.N. debates were still in the early stages. The rise in the price of oil over the past several months reflected both higher costs to businesses and consumers and also served as a barometer of the likelihood of war and victory. The inverse relationship between the price of oil futures and the level of equities has been like placing a mirror between the two charts and that relationship continued today. Oil futures spiked $1.75 per barrel, bouncing from that zone of support and making up 144% of the drop from Friday.

Chart of the Crude Oil Futures

Further evidence that the developments in Iraq are dominating the market action came from the activity in travel related stocks. The Airlines took a beating, reversing much of Friday's gain in the XAL, with a loss of 9%. Some of the biggest losers in the sector were American (AMR -12%), Continental (CAL -17%) and Delta (DAL -15%). The hotel stocks also headed lower, with Starwood (HOT) losing 10% and Marriott (MAR) dropping 8.6%. Part of this was due to Starwood withdrawing first quarter and full-year guidance, but even that was related to the Iraq situation. The company said there was "significant deterioration in business due to the elongated Iraq negotiations and the related geopolitical conditions that worsened over the quarter and culminated recently in armed conflict." The bleeding continued into the travel reservation stocks, with big losses in Expedia (EXPE -4%), Hotels.com (ROOM -6.7%) and Sabre (TSG -5.3%).

Those traders following the bullish percents of the major indices have seen the rally produce the first upturn in those percents since December. That indicates that there has been enough buying interest to not only make up for recent losses, but establish enough point and figure buy signals to change the percent of stocks giving those signals in the Dow from 10% to 40%. It would also indicate we should be looking to buy dips, as those percents are just coming out of oversold territory and are nowhere near overbought at 70%. But there are a couple of concerns here. First is picking a support level as a bottom after a meteoric rise that didn't pause for very long at any particular point. If the previous levels of support and resistance weren't very important on the way up, with the market simply moving on geo- political developments, then they may not be significant on the way back down, either. Which brings us to the second concern - how much do the technical market indicators mean when we are in this environment? If the action from last week is any indication, the market loves a U.S. victory and if traders believe we will eventually be successful, then shouldn't we at least revisit the level we were at before the weekend, when victory seemed imminent? Of course a bear would suggest that the world mostly believes the U.S. will eventually be successful and we still got a big correction today; so maybe last week's action was just short covering to protect positions in case of a victory over the weekend and now those shorts aren't in such a hurry to cover. If that is the case, then we could be looking at a return to the previous downtrend once the war is behind us and traders are left to focus on the economy.

Chart of the Dow Bullish Percent

Certainly we could have expected the travel related stocks to suffer during war time, as Americans and even worldwide travelers would avoid the dangers of traveling and U.S. citizens also want to avoid the possibility of attacks in foreign countries. But how is the war affecting spending here? Retailers saw a drop of about 3% in sales during the 1991 conflict. This time around analysts have been expecting a drop of only around 1% as a result of war. However, Federated (FD) announced it was seeing a drop of 3-4% since last Wednesday and J.C. Penney said sales were trending below expectations, as well. Wal-Mart, on the other hand, said sales were on target over the weekend. We get Consumer Confidence numbers out on Tuesday, so we should get a snapshot of how the war is affecting consumers' willingness to spend. Of course, with things turning south just over the weekend, we may have to wait for the University of Michigan Consumer Sentiment report on Friday for a clearer picture.

The defense sector was one of the few winners today in the equities, with the DFI gaining 0.55. These stocks were sold off hard even as the U.S. moved closer to war. They bounced on the invasion and then sank as the U.S. forces got little opposition in the initial phase. However, today we saw gains from contractors such as Northrop Grumman (NOC +$2.08), Lockheed Martin (LMT +$1.00) and L-3 Communications (+$0.35), following the possibility that a longer war will require more re-stocking of the U.S. arsenal.

Traders watching the Semiconductor Index for indications of tech sentiment saw that group turned back from its exponential 200-dma (337), where it ended on Friday, as the selling hit all sectors, with the exception of defense. The SOX, which cracked its simple 200-dma (currently 313) last week, is now sitting between the two averages and the next move through either should give us an indication of which way the techs are headed next.

The NYSE ran into some public relations problems on the nomination of Citigroup CEO Sandy Weill to sit on its board. After shaking his head at the effect that putting the CEO of a company that has had some problems with the SEC on the board of the NYSE, New York Attorney General Eliot Spitzer called NYSE chairman Dick Grasso and said he would publicly and vigorously oppose Weill's appointment. Weill eventually withdrew from consideration.

We continue to see news driven markets and picking a direction will be extremely tough under these circumstances. As long as OEX 437-440 holds up, traders looking to capitalize on rising bullish percents can try buying the dip. However, as this afternoon's propane explosion highlighted, support/resistance levels may not hold up the way they would in a traditional market scenario and traders relying on them should be trading only high risk capital.


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