OPENING POSITION
May 2003
Is the worst over? In the final days leading
up to the US strike on Iraq, we saw the equity markets stage a significant
rally. We also saw the oil market move dramatically; crude oil prices had
been above $36 per barrel, but prices fell quickly to the $27-28 range
after the uncertainty factor concerning the impending war was removed.
War rumors had depressed the markets, and traders considered the elimination
of the uncertainty to be favorable. But the question remains: Is this "relief
rally" just a relief, or is it going to be sustained?
While we are on the subject of war, there
is always the possibility of further, retaliatory terrorist attacks, and
let's not forget the possibility of further geopolitical tensions with
North Korea and Iran, the countries President George W. Bush considers
to be the other spokes of the "axis of evil." But political tensions
are external factors that affect the markets. The long-term performance
of the markets is based on underlying economic conditions, and unfortunately,
this rally has nothing to do with the economics. It has to do with trader
sentiment, which works for the short term, but you can't ignore economics
if you want a longer-term look. Consumer confidence has fallen to extremely
low levels, consumer spending has slowed significantly, market capitalization
is at very low levels, and companies are still laying off thousands of
employees. It's only when the building blocks of the economy start improving
that we can expect to see a turnaround.
Last issue, I commented that the Dow Jones
Industrial Average should drop to as low as 5000 or so before we can expect
a sustained rally. It's more than an impending war that has brought the
markets to their current levels. Other factors include the overall health
of the US and global economies, corporate earnings, and the price of oil.
When it comes to determining the direction of the stock market, however,
economic conditions are the essential factor. And current economic conditions,
both global and domestic, are clearly not positive.
If you think my view is pessimistic, see what
Ian Gordon of The Long Wave Analyst newsletter has to say in our
interview this month, starting on page 74. According to Gordon, the current
weakness in the market has nothing to do with the war. The bear market
started before the threat of war in Iraq, and he reminds us the reason
for the bear market in stocks is the significant malaise in the US economy -- and that is only going to get worse. His view may not be a pretty one,
but it does give you an idea of how much worse things could get.
So don't let these short-term rallies get you too excited. Remember:
we're in a bear market, and if you have any long positions open, you might
not want to hold on to them for too long. It's possible that the worst
is far from over.
Jayanthi Gopalakrishnan,
Editor
Originally published in the May 2003 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2003, Technical Analysis, Inc.
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