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Shot and a Chaser



As the prospect for military action in Iraq moves closer, the market is having the opposite reaction than it did prior to the Persian Gulf War in 1991. The likelihood of a brief war and the removal of the uncertainty surrounding the situation are already being reflected in equity prices as the market is up nearly 8% from the lows of less than a week ago. Clearly, the rise has been more than I and most others expected. One week ago, the market was viewing a rift between the US and the UN as a negative and now the reverse appears to be true.

The question is whether this is another bear market bounce or something that proves to be more sustainable like the lows last July and October. The real answer is that we will only know after the fact. As you all know, I have been urging patience in buying because the intermediate-term fundamental, valuation, technical and geo-political backdrop does not, in my opinion, lend to a sustainable rally. Obviously, taking prices from last Thursday, that looks like a foolish opinion, but the reality is that the market has simply bounced back toward the breakdown point in January, which now serves as a resistance area (Exhibit 1).

Nothing has changed fundamentally in the last few days, valuations remain at high end of neutral, despite the recent gains there has been no shift in the intermediate-term technical outlook and the War hasn't even begun yet. All these could be resolved in a positive way, but to be a buyer AFTER a nearly 8% gain in three days makes very little sense to me. The true test to sustainability will be the way the market corrects the recent gain. Do I wish I yelled "buy, buy, buy" last Thursday? Yep. Have I felt that way a number of times over the past three years? Yep.

Exhibit 1 - Market has bounced back toward overbought and resistance.

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