For February 21, 2003
The Sand Devils: A Market Toboggan Ride
Was Saddam Hussein's fate sealed . . . last week, by none other than bin Laden? It may be so; but in either case stress has ramped back-up quite a bit, and not without a number of reasons. In a sense bin Laden's admission of 'convergence of interests' with Iraq's socialists may not have provided the direct linkage some are looking for, at the same time as it does amplify the idea that forensic evidence isn't the only way to draw linkage between terror groups and states that wittingly cosponsor such efforts. It becomes less a function of physical trails (though those are there to an extend) and a bit more of a tie of philosophy and ideology, that again has made strange bedfellows.
Today an occasionally heard story again made the rounds; a trio of terrorist freighters presumed to be plying the waters of the Indian Ocean or other blue water areas. This is an interesting saga, because it is said the ships were dispatched by Iraq, but might serve a terrorist purpose. Supposedly this is all being surveyed by intelligence, with a reticence to board, fear they might be scuttled, with environmental hazards (more).
There also have been a few reports of bin Laden having garnered materials for some sort of device (to become a martyr as he alluded to in the last message?) that might be taken by boat into any of many crucial economic trading choke points. As pointed out in the Weekly Standard, Singapore, Gibraltar, Suez and other locales are at risk for such attacks. The idea that missing Pakistani nuclear scientists or any radioactive materials from North Korea are combining in this macabre tale are ominous, but in or of themselves not the key to the threat. We might add that a coincident revelation just today, that the same freighter than carried Scuds to Yemen has returned to North Korea, carrying Sodium Cyanide, is worrisome. Cyanide is used in making nerve gas (more).
It's all enough reason to have perceived Wednesday's market as not being able to do the upside extension in the morning, and that was so. Nevertheless we suspected an afternoon rally, but when nothing happened by mid-afternoon, we retreated from the idea of very much, while allowing for just some intraday squaring. Well, it occurred in the final hour, but did hold through the close, though the market was still down a bit. We have suggested that Thursday would see opening continuation upside efforts just for a bit, before downside activity returns (hence the 900.933.GENE hotline's shorting the opening upside on Thursday, as far as our theoretical guidelines are concerned).
At the same time, we warned Tuesday evening that the rally off the 800 area was running out of steam, though might not see lows threatened for the core technology stocks, particularly Semiconductors (SOX) and Nasdaq 100 (NDX) leaders. Later in this abbreviated week we got an upgrade for the SOX from one major firm, which we suspect sees the accumulation going on somewhat subtly by fund mangers in these issues, which again reiterates (probably) why they failed to decline in the last market dip, as observed, and as setting-up the rebound that began from oversold last week.
Our perception in those sectors was and remains that -barring catastrophe- the post-3rd Quarter miserable earnings (which triggered washouts thought to be buy points in many prominent issues, and future ingerletter.com ideas, reserved for readers), might be in harmony with short-term prospects; risks normally not hallmarks of protracted trends. Hence, the idea was that some investment funds could be committed during last October's purges at that time, with partial (trading) portions possibly withdrawn during January's early rally, with no reason to chase prices then, or since, in erratic pre-war (and potentially) terror risk times. Now, there are occasional short-covering (or Expiration-related) upside squalls, that appear to be contratrend moves, as they may be. But barring real disaster, the subsequent downward probes, especially if they briefly take-out the preceding lows without moving leading domestic and tech stocks to lower lows (reserved for ingerletter.com readers), but if all goes well are still part-and-parcel of preparing the market for higher levels later on via lower levels first.
The renewed concerns about troop movements and 'terror ships' surely had at least a nominal contribution to Wednesday's market, including Tom Ridge's remarks, as that might have been interpreted as a 'get ready for war' preparatory comment. It's tough, of course, not just because heavy armor isn't fully ready (air forces are), and while at least some political squabbling about basing continues, but particularly so because of the perceived risk of terror attack aimed squarely at world economic activity, as we've suspected was al Qaeda's target all along. Some believe the U.S. did a very good job of disrupting the terror network from a perspective of how it was structured pre-9-11, and that may be so. But the risk clearly is of a lashing-out in some dramatic way, which even if it's the death-knell of al Qaeda terrorism, as it might still wrack havoc on the world's economy for a long time. That idea provides the greatest concern, and it's even more so than Iraq. (Balance of geopolitical/market discussion is reserved.)
That the recent relief rallies were likely off a well-watched March S&P 800 area, was a reasonable expectation, while the idea they'd have trouble attacking or surmounting the daily resistance level (860 or just over it) absent some actually constructive news, was also logical in this environment. However, we want to caution against getting too doctrinaire bearish in this timeframe, because although before the year even began we tried to outline expectations for a 2nd half January fade, some minor rebounds and even a relief rally following a failure of any late Jan/early Feb bounce, within confines of a renewed effort at a war-jitters February dive, and then this recent pre-Expiration bounce, that's not to suggest the market will be submarining for an extended period of time later on, as some are convinced will be the case (specific ideas reserved).
(Reserved.) What generally we're suggesting is that the bulk of a rebound ahead of an Expiration has been seen before Wednesday, at the same time as a dramatic renewed drop to lower lows would likely be temporary in structure, though there are many problems remaining to sort out besides common threads surrounding how markets might behave in the face of outbreak of hostilities.
You know that there is a common perception that money managers are awaiting the first strike against Iraq to create a washout to buy-into. Well, not so simple (reserved).
For instance how multinationals dominate Dow Industrials may make a difference, as odds may favor technology components of the DJ to come under less pressure. That most major strategists have been negative to skeptical about 'tech' suggests the sector is thoroughly drained, and hence the only question is when the revival comes.
Daily action . . . repeatedly has seen intraday patterns where prices rebound later in the session, though sometimes not maintained into the close. Perceptions about this tend to follow the theme that traders are emboldened if 'nothing happens' earlier in a day, then they come in on the buy side. However that doesn't explain not exiting prior to a day's close, although intraday squaring (and Expiration-related short covering) of course could account for part of that. And today was the Wednesday before nominal Expiration, a session in which we suspected that negative morning action would be a bullish set-up for the afternoon, although the hotline (900.933.GENE or direct-access dialing) withdrew the upside optimism late in the day, due to an overwhelming series of items thought likely dissuading much upside beyond mild squaring later in the day (well, it really wasn't all that significant, but it did snapback considerably; then we did properly move to the short-side again in early Thursday action, at the 849 level).
Thus in a sense there may now be a smoking gun 'cruising' out there; in the form of freighters. That story, surfacing in a couple venues of three 'terror ships' that sailed from the Mideast in November, and have been eluding contact with patrols ever since (radio silence as a factor, which is against maritime law), has clearly got our attention if not the market's (yet), but it would seem to be the kind of target that's findable and can be dealt with. The tie-in between who dispatched it, and intent, is still a bit vague.
(Reserved.) With Banks heavy, Oils soft, and Gold up in a rebound (following recent breakdowns), and tech nurturing recent rebounds, it's impressive that the market did came off its lows as much as it did, though we believe it was a 'constructed' rebound.
Bits & Bytes . . tonight touches on Intel (INTC), Texas Instruments (TXN), and Microsoft (MSFT), as well as Lockheed Martin (LMT) and new laser-weapons.
In summary . . the market was thought exhausted by normal measures, with limited downside remaining, sans events, before the end of last week. We'd gotten big sell-offs in Senior Averages unaccompanied by meaningful tech weakness, a very normal sign of exhaustion. An extension after pullbacks was seen as likely after an easing in the morning, but we observed the meat of the rebound (for this phase) may already be seen, with an assault on the daily moving averages possibly ahead at best here. A few economic reports were not discouraging, such as firm housing starts and permits.
Serious events (and potential ones) still continue reminding us of various risks Allied fighting forces may face, not only given new threats received (some reported, some not) in the midst of solemn and challenging times for sure, and not limited to an easily definable theater of operations. We have to keep in mind that the unexpected, which we unfortunately can't dismiss as overwrought citizen worry, remain a risk as western civilization cheers human progress, amidst ongoing concern about barbarians trying to reverse hundreds of years of modernity, in their quest against the advancement of mankind. We have said this for well over a year now, and nothing has changed this.
McClellan Oscillator eroded over the past couple weeks, with the pattern then sort of looking to be groping for a short-term low; but probably not much more as of yet; with daily moves subjective responses to news and events, of course, while overall the heart of the decline was perceived past; aside from emotional short-term bursting if something happens. As of now the NYSE reading's recovering at around -38, while NASDAQ's mildly easing to a reading of -4. It's all sensitive, subject to change, and likely to require subjective instant analysis as it all continues to pour out.
The threat matrix was projected to be robust in February, as it continues to be, and that's just what we have to contend with, as investors, and as citizens. (Forecast is reserved for readers; but generally believes the bulk of the rebound is consumed, as the market may not behave as conventionally believed if and as hostilities start.) It is a time of anxiety, and hopefully for most techs, the lows remain those of last Fall. For now we have S&P futures off a few ticks in mid-evening trade on Globex.
Gene Inger
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