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Stocks Sink Worldwide on Terror Concerns

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     03-22-2004            High     Low     Volume Advance/Decline
DJIA    10064.75 -121.85 10186.15 10012.16 1.76 bln    602/2242
NASDAQ   1909.90 - 30.57  1929.28  1897.63 1.96 bln    645/2485
S&P 100   536.10 -  7.58   543.68   532.91   Totals   1247/4727
S&P 500  1095.40 - 14.38  1109.78  1089.49 
RUS 2000  558.99 - 11.75   570.74   557.94
DJ TRANS 2750.80 - 36.03  2791.95  2746.30
VIX        21.58 +  2.43    22.67    20.61
VXO        21.43 +  2.27    22.66    20.41
VXN        27.15 +  1.16    27.79    27.06
Total Volume 4,218M
Total UpVol    430M
Total DnVol  3,740M
52wk Highs     159
52wk Lows       76
TRIN          3.32
PUT/CALL      0.97

Stocks Sink Worldwide on Terror Concerns
By James Brown

Mondays have been pretty rough for the markets this month but this time the selling was felt globally. Early morning news that the Israeli military had killed a key Hamas leader in Palestine sent stocks lower around the globe on heightened terror concerns for retaliation. Airlines stocks were key leaders to the downside followed by biotech and tech-related stocks.

Last Friday the markets were focused on a heated battle between the Pakistani military and several hundred suspected Al Qaeda militants just outside the Afghanistan border. It was rumored that Osama Bin Laden's right-hand man, Ayman Al-Zawarhi, was cornered and the reason for such stiff resistance. Unfortunately, by Monday Pakistan was downplaying who might be found when the fighting eventually ends after discovering that any high-value targets may have escaped through a series of tunnels from the rebel hideouts.

Investors were also focused on the Taiwan general election held Saturday after Friday's shocking assassination attempt on the current President and Vice President. The two were shot and injured on Friday while campaigning but neither were seriously injured. Now that the election is over and the incumbents won by a very narrow margin the opposition leader Lien Chen is fighting for a recount among allegations that the President may have faked the assassination attempt.

The real story responsible for today's stock market weakness was news that the Israeli government had eliminated Sheikh Ahmed Yassin. Yassin was considered the spiritual leader of the Hamas; which is an extreme Islamic fundamentalist group in Palestine whose purpose is the destruction of Israel. Not surprisingly the U.S. State Department has labeled Hamas as a terrorist organization. Some even referred to Yassin as the godfather of the suicide bombings that have been plaguing the region for years. The global concern is that terrorists organizations around the world will "retaliate" against their local governments, U.S. interests and or the U.S. itself. Israel has denied the allegations that it informed the U.S. of its plans but that has not stopped Islamic groups from pointing fingers at the U.S. and saying we must take responsibility for the attack. CNN said that one Islamic website published a statement from Al Qaeda saying they would seek revenge against the U.S.

With the Madrid bombings still fresh in everyone's memory the natural reaction was to sell stocks and sell they did. Asian stocks were hit hard with the Japanese NIKKEI down 100 points to 11,318. The Chinese Hang Seng fell 239 points to 12,550. The Taiwan exchange's main index fell 6.7%, its biggest decline in eight years. European stocks were hit hard as well. The British FTSE dropped 1.9% to 4333. The French CAC fell 2.05% to 3539 and the German DAX dropped 2.35% to 3729. According to Bloomberg all 17 of the Western European markets closed lower and 46 of the 59 world indices they track traded lower on Monday.

The Dow Jones Industrials dropped almost 122 points to close at 10,064 up from its lows near 10,012. The NASDAQ Composite slipped more than 30 points to 1909 but it too rebounded from its lows near 1897. The S&P 500 index declined 14 points to 1095 closing under key support at the simple 100-dma and the 1100 mark. As one would expect market internals were very bearish. Declining stocks outnumbered advancers 22 to 6 on the NYSE and more than 4-to-1 on the NASDAQ. Down volume completely overshadowed up volume by more than 12-to-1 on the NYSE and about 7-to-1 on the NASDAQ. It was just last Monday (3/15/04) that we witnessed heavy down volume of 9-to-1 and 10-to-1 extremes.

These are very bearish extremes and they don't bode well for the future. The bounce from the 10,000 level in the Dow today might offer us a chance at an oversold rebound but I don't have a lot of confidence on how high it can go - not with new resistance near 10,325. The NASDAQ produced a similar bounce from its test of the 1900 level but odds of a rebound here are stronger with the simple 200-dma at 1886. Of course the NASDAQ hasn't hit this technical support just yet so it may remain weak until it does. The bad news/good news for tech stocks is the semiconductor sector (SOX). It closed under its simple 200-dma (bad news) but it bounced from historical price support near 450 (good news). Maybe the SOX bouncing from 450 can help the NASDAQ bounce from 1900.

What's really disturbing is the breakdown in the S&P 500 index. It has broken support at both the 1100 mark and the simple 100- dma. Yes, the afternoon bounce from its lows looks like it might continue to rebound tomorrow but this index looks like a short with some support at 1075 and more support near its 200-dma at the 1050 level. One potential saving grace is the fact that the S&P 500 is now down 5.4% from its highs. A lot of investors have been waiting for a "correction" from the highs in the market to jump back in. The S&P 500 is considered to be "the market" more than the Dow or the NASDAQ. The only problem is that a correction tends to be 5% to 10%. This is the first 5% correction for the S&P in a year. Meanwhile the Dow is down 6.3% and the NASDAQ is down 11.3% from its recent highs. The only challenge I see here is that new terrorism fears are a growing concern that will impact investor eagerness to buy the pull back.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

Chart of the S&P 500:

Renewed terror concerns are no stranger to the airline stocks and the combination of the Madrid bombings, today's event in Israel and the rising cost of oil has sent them to new relative lows. The XAL airline index dropped 3.2% to levels not seen since early August 2003. Terror concerns aside the rising price of fuel is killing the sector. It is estimated that for every $1 jump in crude oil prices that the airlines lose about $500 million a year in profits. Right now oil is near 13-year highs in the $37-38 range and expectations are for oil to hit $40.00 a barrel soon. This has lead both Lehman Brothers and Merrill Lynch to issue some negative comments on the sector this morning, which only added to the selling pressure. One analyst suggested that the airline industry will report a loss of more than $2 billion in 2004 instead of the previously estimated $600 million loss. Hopefully the recent rumors that OPEC may actually postpone their planned April production cuts are true and we'll see a pull back in the price of crude oil; which would benefit the entire economy.

Speaking of the economy Wal-Mart (WMT), the world's largest retailer, seems to be doing well. The Dow component said its March same-store sales are still tracking near the high end of its 4% to 6% growth range. In their update this morning WMT said seasonal items for Easter along with food and electronics were their strongest categories. WMT wasn't alone when it came to issuing good news. Another big cap retailer, the Limited (LTD), pre-announced stronger earnings after the bell this evening. Analysts had been expecting LTD to turn in 9 cents a share but the company now sees earnings in the 11 to 13 cent range. Boosting performance have been strong results from its Bath & Body Works and its Victoria's Secret stores, which recently launched a new bra line earlier this month (-Reuters).

Another Dow component making headlines was Microsoft (MSFT). The EU has finally decided to fine MSFT 479 million euros or $613 million for its antitrust practices. That in and of itself is not a big deal. MSFT has been hoarding cash and currently sits on more than $50 billion. Of course MSFT doesn't believe it should be fined at all and plans to appeal the decision. What concerns the market is how the EU might punish MSFT with new regulations on how to do business in Europe.

Tomorrow could be interesting for traders. Will the major indices continue the feeble afternoon bounce from critical support levels at 10,000 for the Dow and 1900 for the NASDAQ? Will the S&P 500 rebound back over the 1100 level? Or has the Hamas leader elimination in Palestine already set the tone for the week? Tuesday is empty of any economic reports but we will hear earnings reports from Goldman Sachs (GS) in the morning and Red Hat (RHAT) after the closing bell. Wednesday brings the Durable Goods Orders and the New Home Sales numbers. Meanwhile it may not make the news but there will be at least three Federal Reserve governors (Guynn, Minehan and Parry) speaking across the country on Wednesday as well.


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