Prayers and prospects
Today appears to be the moment of truth for the world as outlined by the leaders of Spain, Portugal, Great Britain and the United States. As I powered up my systems this morning, the first headline is that the US was advising the UN to pull the inspectors out of Iraq. That seems like a pretty good sign that an attack is imminent. Unless Saddam starts wheeling out chemical and biological weapons, it seems rather clear that the "coalition of the willing" is going to follow through on their promise to rid the world of Mr. Hussein. How are the financial markets likely to react to such an attack?
The problem is that answering the question would be a pure guess. I know, I know, you are saying to yourself that it is always a guess, but last Thursday's rally really makes it a pure guess. The market (as defined by the S&P 500) is no longer near-term oversold (Exhibit 1), which means that some level of short covering that may have taken place on the initiation of conflict has already been executed. So again, everything is neutral. If the market were getting creamed going into this week, then I would give the bulls the edge. If the market were overbought and spiking for more than one day, I would give the bears the edge.
Exhibit 1 - The market is no longer near-term oversold
Obviously neither is the case so no one has the immediate edge. As a result, one must default for the time being to the intermediate-term outlook, and assume that Thursday could be a one-day wonder in the context of a trend lower toward and intermediate-term low. Last Thursday I outlined that there were four one-day gains of 2% or more in the move into the July low and two jumps of greater than 2% as the tape approached the October lows. Exhibit 2 shows that graphically. So far the action seems to confirm that a sustainable rally has not yet begun. So the message is that I can find no edge near-term and the intermediate-term indicators continue to urge patience in buying.
Exhibit 2 - Prior spike days in moves toward intermediate-term lows
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