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Longer and Harder

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      03-25-2003           High     Low     Volume Advance/Decline
DJIA     8280.23 + 65.60  8337.72  8180.72 1.61 bln   2323/ 916
NASDAQ   1391.01 + 21.20  1400.14  1369.32 1.41 bln   2042/1112
S&P 100   444.77 +  5.10   447.56   438.63   Totals   4365/2028
S&P 500   874.74 + 10.51   879.87   862.59 
W5000    8279.27 + 98.80  8320.11  8169.61
RUS 2000  371.79 +  4.54   372.22   367.01 
DJ TRANS 2202.07 + 18.70  2208.13  2170.38   
VIX        32.66 -  2.54    35.14    32.50   
VXN        45.00 -  1.36    47.32    43.69 
Total Volume 3,313M
Total UpVol  2,727M
Total DnVol    491M
52wk Highs  149
52wk Lows   120
TRIN       0.55
PUT/CALL   0.94

Longer and Harder
By Jim Brown

Rumsfeld said the war could be much longer and harder than previously thought and cautioned Americans from expecting a quick resolution. The markets rallied on the news, which showed that severe oversold conditions are more important to traders than heavy resistance slowing the troops. The news of potential popular support against Saddam in Basra rallied the markets but news of a revolt in the US Senate tanked them again.

Dow Chart - Daily

Nasdaq Chart - Daily

The morning started off weak with mixed war news causing volatility in the futures. After moving sideways for an hour the bargain hunters from Monday's crash begin to surface and shorts began to cover. This move was delayed because of the announcement of the Consumer Confidence at 10:AM.

The Consumer Confidence fell to a decade low of 62.5 and down from 64.8 in February. The cutoff date for this survey was March 18th so all responses were before the start of the war and the negative news about prisoners and causalities. This would indicate that the next reading could be even worse. The current conditions and future expectations components were both down. The expectations component fell to 62.5 and was the lowest level since January 1991. Does that date sound familiar? This was the first Gulf war. Buying plans for major appliances and autos fell to the lowest levels since 1996. 47% of the respondents thought the stock market would move lower over the next 12 months.

Chain Store Sales rose slightly at +0.1% and it was the fourth consecutive weekly rise. Sales are still at or below plan for most stores but rising as milder weather for most of the country brings consumers out of their houses.

Existing Home Sales fell to 5.84 million from the January pace of 6.10 million units. The war along with unemployment is offsetting the low interest rates. The housing sales rate fell -4% from January but is still a very robust rate given the conflicting economic and sentiment factors. Since mortgage rates are not likely to go much lower, existing home sales and new home sales are fighting an uphill battle. An end to the war could actually bring higher rates and a steeper hill for sales to climb.

The NYSE terminated the access privileges for Al-Jazeera News claiming they were limiting access to the exchange due to security reasons. Unofficially the reasons were thought to have been due to the network's war coverage. The NYSE said the number of accredited TV stations needed to be reduced and they were limiting access to those with responsible coverage of business issues.

Early in the day there were reports of an uprising in Basra against Saddam's troops with towns people fighting the Iraq troops for control. The sudden prospect of a rapid takeover of this major city spiked the market off its lows. Late news tonight has the Iraq military shelling Basra civilians with mortars and artillery.

There was not much news from the war due to a major sandstorm in the Southern Iraq region. This shut down all low flying air support and gave the US time to perform maintenance on their gear and let supply convoys catch up with the main units. Troops with their vision cut down to mere feet were free to hunker down under cover and catch up on some sleep. This is only a temporary situation. With the lead elements only 60 miles from Baghdad there is going to be even stronger fighting soon. The Republican Guard is between the coalition and Baghdad and there is repeated intelligence that they have been authorized to use chemical weapons when the main fight starts. There are also 25-45,000 Fedayeen hard liners roaming southern Iraq using a hit and run strategy as well as using force to keep regular Iraqi army units from surrendering. The Republican Guard and the Fedayeen are not going to surrender and they are going to fight like junk yard dogs when cornered. Logic and overwhelming force is immaterial as these groups have no place to go when it is over. If Saddam is not in power their protection to rape and plunder will be withdrawn and life could take on a new meaning.

This group was formed by Saddam's son after the first Gulf war to keep the civilians in line. They recently beheaded 200 women for infidelity and put their heads on poles around the country as warnings to others. These are going to be wolves nipping at the side of the columns while the Republican Guard will be bringing the heavy weapons to bear on the front. Fortunately air power will eventually eliminate the Republican Guard but the thousands of Fedayeen, which were recruited from jails and radical factions, will not be so easy. There is also news that up to 5,000 Iraqis who had fled Iraq to avoid Saddam's rule are now coming back into Iraq to fight AGAINST the coalition and for Iraq. They don't like Saddam but they feel Iraq should not be ruled by the coalition. Stockpiles of thousands of brand new Iraqi chemical weapons suits have been found and recent positions overrun have been stocked with gas masks. Once a chemical attack begins things are going to get much worse for the war sentiment.

The market was struggling at the highs of the day and the opening levels from Monday at Dow 8335 and Nasdaq 1400 when news of a Senate revolt hit the markets. The Senate voted to cut the presidents tax cut package to 50% of the requested amount of $712 billion. The limit of $350 billion was seen as a significant limit to the economic recovery and a hit for the stock market. The package as presented was reported to have the potential for a +15% market bounce if enacted. Does cutting it in half only mean we will get a +7% bounce? If so then the market will eventually discount whatever was already priced in when the House and Senate gave tentative approval last week. That approval was part of the motive force for last weeks rally.

The problems for the market are not over. We gained +1100 points in eight days and gave back -242 this week. The Nasdaq rallied back to 1400 and strong resistance again. This was the level that has held for a long time before last Friday's major move. The failure at this resistance again is crucial and shows that sellers are still there. The Nasdaq futures are +3.50 tonight despite RHAT missing estimates by a penny and PLAB cutting its workforce by 10% to 12%. This shows tech bulls are also alive and well. There is strong support at 1370 and strong resistance at 1400.

The Dow is more fluid. There is strong resistance at 8330 and strong support at 8130-8175. The bulls appear ready to sit back and nibble when the averages retreat and the bears have no conviction to press the attack. The recent rally has taken the fight out of the bears and the potential for further gains on any unexpected good news remains. They do not want to step in front of the gun even if they think it is empty.

This leave us with a stalemate. There is no concrete reason for a continued rally. Economics are terrible. Earnings are terrible. The war is likely to get worse before it gets better but everybody is conditioned to think there is still going to be a rally in our future. Why or when continues to be the question and of course how far. Just getting back to the recent highs at 8500 is going to take a huge effort and there are no shorts left to squeeze. The bears may be getting ready to hibernate after a three year run. However, the bulls are still bloated from their recent feast and are not ready for another romp. The result is a likely stalemate until the end of quarter window dressing begins. That buying could begin at any time. What is it going to be? War jitters, chemical attacks, hundreds more casualties or the wrath of fund holders against funds not fully invested. This is going to be another confusing week governed by news and greed. Sounds like business as usual to me.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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