Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Step back


This week looks to open on a rather mixed note. I went back to look at what I wrote at the beginning of last week and was again amazed how something so big could be so different a week later. Last Monday brought a historic blizzard to the Northeast and it is now a distant memory where its only influence will be for my kids to say, "Remember the blizzard of '03. I bring this up because it is important to step back from each market "event" that comes our way and take time to determine the implications. I don't know about you, but when I rush to judgment, it is usually the wrong one. Last Tuesday, the theme of the market was that an oversold bounce was underway and that there could be some level of follow through. Clearly, continuation is more likely when coming from an oversold framework. That framework is no longer valid.

As we enter the fray this morning, the market is on the back of two positive weeks in a row. While they were not dramatically higher weeks, it was enough to alleviate the near-term oversold condition, so now the market is moving to a point where it must pick the next major direction. For all intents and purposes, there were a couple of big bounce days followed by some digestion days, which allowed the market to move from oversold to the high end of neutral.

If I can take you back a couple weeks ago, it looked like war was imminent, the Terrorism Alert system got upgraded and the fundamental news backdrop wasn't exactly stellar. The news seemed as though it couldn't get any worse and the market had become extremely oversold on a near-term basis. A week ago last Friday, the market had been dropping in anticipation of the Dr. Blix UN Security Council briefing and given that who in their right mind would be looking long ahead of a holiday weekend? The truth was that everyone was saying the same thing, which set the stage for an oversold rally.

We got the oversold rally so now what? Dr. Blix has sent a letter to Iraq demanding the destruction of some missiles, Iraq seems to want to resist destroying missiles that they never were supposed to produce, which sets the stage for some powerful volatility. This is a defining moment in this whole geo-political process because it is either going to further divide or bring together the Security Council and indeed the world. Non-compliance by Iraq would unite the world that Saddam will never comply and therefore must be disarmed militarily. That would likely result in a rapid move lower in the market creating a real washout that could lead to sustainable upside.

If Saddam complies and begins destroying the banned missiles, it throws the market into a clear state of confusion. The US military gun cannot stay cocked forever and it seems that unless Iraq starts wheeling drums of chemical and biological weapons out onto main street Iraq, it is going to get fired. Frankly, I can't see how Iraq complying could be good for the market because it would further isolate the US and reinforce the perceived viability of keeping inspectors working in Iraq. The Bush Administration has made our intentions clear and it seems until Saddam leaves his country or he is blown up, the apprehension is unlikely to leave the market.

So the way I see it the only reason to be a buyer (either natural or short covering) several days ago was because of the dramatic oversold nature of the tape on a daily basis. That reason is no longer there and the markets are looking forward to some rather defining moments when it comes to Iraq. Not just defining because of a possible military action, but defining about how the greatest free country in world may be perceived going forward. That has bigger implications than how the stock market trades over the next week.

While I expect one more leg down, which would get my intermediate-term indicators to levels that have preceded an important low (not there yet), if Iraq does comply and destroy the missiles, the market would likely jump. The potential of that should keep the short players at bay to some extent, which buffers the downside, but also saps buying power on a jump, thus making it likely temporary. Dicey times my friends - dicey.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos