The Worden Report (Monday, December 15, 2003)
The "Capture Factor"
Since there was no way for me to append The Worden Report over the weekend, I attached the following note to four primary averages on Sunday (yesterday). I felt that the capture of Saddam Hussein was worth an interim opinion.
SUNDAY -- SPECIAL NOTE:
The capture of Saddam Hussein is almost certain to have a significant psychological effect on the market in at least the short term. It would seem that this can only be a bullish response. Therefore new short positions should be postponed and loss-cuts on existing short positions should be enforced ruthlessly and where in doubt tightened. This is especially true in the tech sector which has been experiencing short-to-intermediate term vulnerability and outright correctionary weakness.
On the other hand, should early strength dissipate too quickly, such as before we get through one day, it would be a sign that good news is being used to distribute stock. This would be a sign of arrant weakness. –DW
Now in the cold light of day, having had the opportunity to observe the market's response to this historic event, I have changed my opinion as it is stated in the second paragraph. The market did indeed fold, unable to maintain the early "pop" -- which itself was disappointing from the perspective of a bull.
However, focus on the phrase, "it would be a sign that good news is being used to distribute stock." At first glance, this would seem to describe the actual outcome. But what I did not foresee is that the capture of Saddam was not universally judged to be "good news" by traders. From the beginning, it was clear the market participants did not see it as clearly "good news." When the market ignores clearly good news, it must always be construed as an ominous sign.
But this was not perceived as clearly good news. The main reason for the skeptical acceptance of the capture is the belief it will have no mitigating effect on the violence that has been taking the lives of American soldiers almost every day. Therefore, how can it be "good news?"
I'm not going to furnish you the answers to such questions, because I don't know the answers. However, the market closed five minutes ago (as I write this), which is four o'clock here and midnight in Iraq. It would appear that they have gotten through a day without any significant terrorist attacks.
Just one day, yes. Too much to hope this is the start of some kind of lessening of the violence? Probably. Personally, I think there will be tangible improvements in the psychological backdrop as time goes by. It may be months. It may be a few days.
And there are other benefits that may derive from this capture. It may be that this capture won't provide all or even much of what we all hope for. But there may be benefits, and I don't think the market has had time to assess them.
It has not been unusual for the market to respond to many events on a delayed basis over the past couple of years. What come to mind first are the almost invariably delayed responses to the actions of the Federal Reserve Board. It was pointed out on CNBC (yes, I'm not ashamed to admit that I often find useful information on that channel) that when they pushed over the statue of Saddam on April 9, thus symbolically ending the war, the response was negative, with a 12 point decline in the Dow. But the next day was a plus and the rally that had started in March continued on its way.
Technical analysis, in my opinion, is primarily the assessment of the supply and demand equation. Sometimes, when an unpredictable event takes control, the market isn't able to make up its mind immediately. This may be one of those times.
The important thing in the stock market is not to get hurt. A strong defense is what will always give you the opportunity to return to the fray. I am suggesting that the outcome of the "capture factor" has not had time to play out. I would be very careful about placing any reckless wagers based on the belief that you have it figured out. –DW
Bad Breadth
Breadth was bad almost across the board. The only exceptions to negative balances were the Dow (15 up and 14 down) and fourteen bellwethers I keep privately (eight up and six down).
I am inclined to treat this market the way it looked on Friday, before the "capture factor." At that time the primary and intermediate trends were up. The minor trend was mixed, which meant we couldn't come to a clear-cut conclusion on the overall market. Today, despite closing on its low, the Nasdaq Composite moved up enough early in the day to give doubt. I am moving that to "neutral" from "down." The Dow and SP-500 remain up but must now be classified as struggling.
With the uncertainties of the minor trend, I have to conclude that it is not a good idea to take heavy and lopsided positions on either the short or long sides. Good-looking chart patterns exist in both directions, and I think it's a good idea to be represented both ways. -DW
ASSUMPTIONS:
Primary Trend: Bullish.
Intermediate Trend: Up but vulnerable and struggling.
Minor Trend: Mixed. Dow up and struggling. SP-500 up and struggling. Nasdaq Comp Neutral. Nasdaq 100 Neutral. |
