Summary for Week Ending 15th March 2003

A highly volatile week this week in the markets which saw the DJIA and the S&P hit a long term trend line on a COT date and then erupt forwards, whilst in the middle we had a number of rumors adding grist to mill such as the arrest of Osama Bin laden and various other fantasies that seem to get the blood boiling. All up, the bulls finally unleashed and showed what they could do, but the danger is that all the energy was spent on Thursday and we may be again headed towards more congestion and confusion.

Last week I wrote that a possible COT was emerging coming into the 12th/13th March. We got what I was looking for on Thursday. This date was arrived at using Bill McLarens 153/4 square, which apparently is still running as a valid underlying cycle in this market. (See this weeks S&P chart for the 153/4 Square overlay). Last friday we had the beginnings of a reversal but there was no carry-over into Monday with the S&P and NASDAQ managing new lows for the cycle and an inside day for the DJIA. Tuesday was down however it could not be said that this downwards trip has been enthusiastic. Wednesday was the supposed COT date and we saw the market close strong at the end of the session, which was followed on THursday with the largest one day rally we have seen since 2nd Jan. This set up Friday as the day that this move should have been consolidated either as up weekly or as an inside day following such a wide range day on Thursday. Action on Friday was extremely choppy and the chart does fit with some consolidation so not too much can be placed into this in my opinion.

A couple of weeks ago I wrote that the market was displaying a bullish undercurrent, that whilst still heading South, was doing so without conviction. This was evidenced by the activity on Wednesday which saw the London market down almost 5% prior to the NY open. I would have expected that with the current downwards trend in place, any excuse to sell is usually taken yet in this instance the market was quite resilient, which gave the best hint that the COT may indeed be valid for the day. I cashed 50% of my DJIA 77 puts about two hours before the close near the low of the day at a good profit, and then watched the market climb almost 100 points in the last 2 hours of trading.

The question is of course,

Was the COT a major point or was it simply signaling the start of a counter trend rally ?

That's a good question, of which I am yet to make an assumption. Looking forward this week I am looking towards the 21st Mar ( equinox) which relates back to a number of dates over the past couple of years. Should the rally hold up then I would expect a termination signal here, or should the decline continue early next week, then I would be looking at Friday as another point of downside breaking. At present I am unsure which it is to be and as such will wait for the markets to tell me more. Looking at the volume figures on Wednesday - Thursday they were above the recent average, so as I said above, was all the energy spent at once ? Also , the approaching war business is also making it difficult to plan a entry.

DJIA See Chart

S&P 500 See Chart




The Iraq War - A Scenario
I am loathe to use this this weekly report as a platform for expounding my thoughts and ideas outside of the markets, however the continued talk of a short war I think needs to be balanced with a countered point of view. My opinion of relative merits of the impending war is exactly that....my opinion and is not for publication here or anywhere else, however the concept of a 'longish' war has been on my mind for some time, and there are of course impacts on financial markets should this scenario play out. The actual result is of course unknown to all, but the ability to look forward and add to the playbook does allow for some forward planning.

Now to look more closely at the War in Iraq. we know that a short was will be good news (for all concerned) but a long drawn-out affair will be disastrous for everyone. Most of the news and media releases have outlined how and why the war will be short, but all this appears to be based upon there being a 'stand-up fight' similar to what Saddam did in the Gulf war. Whilst I believe that anything is possible, especially in war and battle tactics, simply place yourself in Saddams shoes...What would you do..?
I have noticed that the following scenario has not been widely canvassed.

If you assume that he remembers that he made a big mistake in the Gulf war by trying to fight face to face, then that would leave one to expect that Saddam has two options left :

1) Leave the country as hostilities commence or
2) Withdraw all his troops within the Baghdad city perimeter and enforce a siege.

In this case, with all the foreign media inside this perimeter beaming footage 24 hours a day out via satellite, the allied forces cannot afford to be indiscriminately bombing the city as vision of bloody civilian casualties will swiftly sour the mood back home ( remember Vietnam was fought on TV sets back home. ) and the advantage would lie with the besieged as the allied forces would be faced with the unenviable task of routing the resistance in a street by street battle. This would not be good footage to be beaming home on the 6 o'clock news. Following from this scenario, the best tactical move for Saddam is to do what he's been doing with the weapons inspectors....nothing ! and hope the western alliance collapses under pressure back home.

This is just an idea, but from a tactical standpoint it does make sense. I leave it to the reader to come to their own conclusions, except to say... if it seems obvious..it probably is.... and markets rarely do the obvious.