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The Bully Pulpit


Pull up a six month chart of the S&P and spot that flag formation--whichever way it's resolved is gonna be huge!


Good morning and welcome to the rubber room. The wacky wiggles continue to giggle as the Minx makes her best effort to find the path of maximum frustration. Monday's hard reversal, Tuesday's afternoon melt, Hump Day's late day surge--it's quite annoying, really, and it's bummin' a lot of traders out. Factor in the looming catalyst, the sizable performance anxiety and the whisper thin tape and, well, you can understand why the Hair Club for traders is coining money!

The zig zag action in the marketplace can, in fact, be a trader friendly environment if you're super sharp and spot on. If you're a half a step slow, however, it's a legitimate nightmare. The reactive crowd that morphs from green bulls to red bears (and back) are suffering from 1000 paper cuts each session. Think about yesterday--opening rip, pullback, retest higher, fail, grind higher, sell off, spike higher and a strong close. If you can game each and every nuance, my friend, you're a better trader than I.

An interesting thing happens when you take a step back--the jagged edges of the razor begin to dull. Look at a daily chart, pull back to a week, then a month, then a year. It's certainly still a treacherous path but the perspective broadens each time you zoom out. What you need to do, cookie, is identify which frame you're skill set is best suited for. Once you find an appropriate frame, you can then craft a strategy that's an extension of your thought process.

Turning our attention to current events, Dubya's been pretty steadfast in his message that we're going to war and Colin's Powellful speech yesterday seemed to indicate that it's sooner rather than later. In an effort to add clarity to an one of the most difficult junctures of our trading careers, I wanted to walk through some potential scenarios. Please understand that this is not a political opinion--I'm simply trying to (humbly) discount potential outcomes and factor them into our risk profile

A) If we attack Iraq without U.N support, I can't imagine the market's reaction will be favorable. In fact, my fear is that it'll be an absolute mess. It's not about whether it'll be a quick war--we're obviously in a position to clean house when the time comes. The issue, in my mind, is the financial ramifications associated with a unilateral attack. If we disregard the U.N security counsel, what will the repercussions be for the dollar, crude and foreign investment? Further, an uprising of anti-American sentiment is very possible and that's potentially negative on many different levels.

B) If another U.N resolution is rushed through and we (somehow) gain support of the rest of the world, the initial knee jerk reaction will likely be higher. The biggest risk on a macro level, in my view, is the backlash and resentment from overseas. Alleviate that unknown and psychology will shift to the bull camp. There remains a (greater) risk of terrorist retaliation if we attack in any capacity, so factor that into the mix if we "go in."

C) Saddam steps down. Clearly the most bullish scenario and we'd likely lock limit up (in the futures) as performance anxiety kicks in and the psychology pendulum swings hard. More likely than not, this will spur the gorillas to put money to work after a long, dormant sabatical. With that said, I'd like to make a few points. I remain of the (humble) opinion that the war excuse is analogous to Y2K, electoral confusion, accounting irregularity or corporate malfeasance. In other words, it's been an excuse for companies to shift the focus away from the fragile state of business. While the uncertainty of the geopolitical landscape is surely weighing on psychology, the overcapacity in the market is a function of the bubble--not war. Also, it's important to note that cash reserves in the fund community are tickling historical lows and while money will go to work, it remains to be seen how long that demand lasts.

The market's reaction will surely be colored by the field position of the tape. If we rally into a war, there's an increased likelihood that the first move is lower. If we slip hard before it starts and the short base is built, the chances of a rally are much better. I could be way off in this assessment but this is what crystallized in my mind's eye and I wanted to share it with the Minyanship. The entire situation is a can of worms and I'm not sure that there's any easy answer. I continue to feel that prudence remains the better part of valor and capital preservation (and risk management) should be the backdrop of any approach.

One day at a time, my friends, as we find our way down this precarious path. This tape is no joke, Minyans, and I want to see each and every one of you on the other side of muck. With a little luck and a lot of discipline, we'll find our way to better times and easier tapes. In the meantime, keep that right hand up, play within your means and no matter what happens, remember to think positive.

Good luck today.

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