Neither Rhyme Nor Reason
March 13, 2003
Right on schedule, I pan the global markets big time, and they thumb their collective noses right back in grand style. (Has anyone noticed that when I finally decide to raise the big gun alarms, the markets tend to come back with monster rallies? You might want to put that in your pocket for short-term market indicators!). I will retaliate by writing yet another missive - you can tell I simply pay too much attention to this stuff! :)
You all already know how to truly interpret big monster rally days during a bear market by now, but I was particularly struck this time around by the lack of real reason behind this one. Sure, there were plenty of technical market factors suggesting such a rally has been long overdue. I won't bore you with those. But there truly was NO real news today to ignite this rally. In just my last missives, I suggested a rally was likely but on some kind of war-related or terrorism-related news. We got neither today, really. Instead, for once, the U.S. market followed the European markets which rallied big in a technical bounce from the massive selling that reached a climax this week.
Anyway, I am already getting long on the technical details and nits and nats. Let's review the reasons for buying into this rally:
Anyone buying yet?
One thing I can say for sure is that the stronger this rally is BEFORE war begins, the higher the likelihood that people will sell the news of the war. And who cares about a BIG war rally anyway that just takes the markets back to even for the year, or perhaps, =gasp= even with those December highs!? The big rally only represents how bad things had gotten.
The whole idea of the "war rally" is that the first bullets and bombs return some type of certainty to the markets that can only be disturbed by the war proceeding terribly. We rally too much ahead of the event, and, voila, the buyers who anticipated the event will have plenty of reason to cash in. Regardless, we are already mixing in the ingredients now for perhaps the biggest headfake yet of this bear market. While just as I predicted we would retest those October lows around this time, I had no expectation that it might tie into angst over Iraq. I still believe that those October lows will not hold in the end. And resolution of war uncertainties will merely serve to get people focused again on how the economy is really doing.
Finally, you all are NO fun! Not a single person submitted a rosy scenario by which the economy turns around and encourages higher and healthier stock markets. So, I had to search for one myself. This is from Barron's the weekend of March 1, 2003 ("Bushwhacked: The Mother of All Reality Shows!" By ALAN ABELSON ):
"The war, [Stephen Roach, economic advisor at Morgan Stanley] notes , could go well -- that is, quickly and free of any baleful unintended consequences. In blessed consequence, "the world could come back together in celebrating the end of a tyrannical regime. World equity markets would undoubtedly rally -- ironically, just as everyone expects -- and the confidence factor would swing from negative to positive in a flash." Oil prices would likely dive, he continues in this mildly rhapsodic tone, in effect providing humanity at large with a giant tax cut that would unleash "animal spirits." Toss in policy stimulants and the global economy could swiftly "morph from bust to boom.""
I will let you draw up the odds on THAT one.
As always, be careful out there!