War Anticipation and Rally Rumination

The market opened with Dow- and S&P-oriented stocks heavy, while tech was fairly strong. I guess tech bulls were emboldened by the fact that Applied Materials (AMAT - commentary - Cramer's Take) wasn't down much on the back of last night's disappointing quarterly results. (Even ever-optimistic CEO Jim Morgan couldn't get the pom-poms out.) In any case, the SOX was quickly up 1% in the first half hour, and that pulled the tape higher.

Tech Keeps on Truckin': Then, news that a suspicious-looking truck had been stopped on the Whitestone Bridge in New York City precipitated an immediate selloff, which saw the S&P and the Dow down about 0.75% in the first hour. Even so, tech was trying to hang in there. It was almost as though the cadre of market-neutral funds that proliferates these days is long "normal" stocks and short tech. Neither side of that trade is working very well, and that continues to pressure both sides. This idea was suggested to me by a friend, and it's what my own eyes have been telling me. I don't know if it's true, but it's the best explanation I've heard for the squirrely action, so I thought I would pass it along.

The early morning pattern held true to form, with the market slowly leaking all day and closing on the low tick. Financial stocks were heavy, as was General Motors (GM - commentary - Cramer's Take), which was down about 7%. Meanwhile, the chip stocks still give a pretty good account of themselves, in going down only grudgingly. All in all, there was not much to comment on. It was just like so many other days where the market can't go down well and can't go up, but continues to leak.

Away from stocks, the outside markets continued to be buffeted by geopolitical events, though many of the moves were small. Fixed income was up slightly, as was the dollar. The precious metals, though, were under pressure again, with gold down about 3%, closing down $10 to $353. Silver was down just over 1%.

Index	Close	Change
Dow	7758.17	-84.94
S&P 500	818.68	-10.52
Nasdaq Composite	1278.94	-16.52
Nasdaq 100	956.73	-14.88
Russell 2000	355.38	-4.58
Semiconductor Index (SOX)	264.43	-2.14
Bank Index	698.12	-8.27
Amex Gold Bugs Index	133.25	-4.49
Dow Transports	2100.67	-27.61
Dow Utilities	190.22	-6.63
NYSE advance-decline	-1,224	-631
Nikkei 225	8664.17	+179.24
10-year Treasury Bond	3.91%	-0.045

Amphibious Assault on Ambiguity: Turning to the geopolitical arena, everyone pretty much knows what war uncertainty has done to raise the angst level in the financial markets. Meanwhile, as the holding pattern continues, I thought it would be worthwhile to discuss my three reasons for expecting some kind of rally on the back of war. First, markets, be they commodity or financial, generally breathe a sigh of relief when uncertainty is resolved. When the war breaks out, this will trigger a knee-jerk response that could last anywhere from 15 seconds to two weeks.

Second, there is the controversial possibility that the outcome of the war will result in the world being a better place, which is my view. I say controversial, because one could argue that the world will be a worse place. There is plenty of room for argument on both sides. My goal here is not to convince people of my view (I know that many disagree with me), but just to make the point. If the war goes well and produces the belief that the world is a better place, that will add some fury to the rally. If it goes the other way, that will undercut the rally. In any case, I don't really want to get into politics, but since politics and markets can flop together, sometimes this can't be avoided.

Fading Battle Fatigues: Third, we could expect a rally on the back of war, just because people now have an excuse to rationalize all the weakness we have been seeing. In fact, while Iraq has added a level of geopolitical angst, that does not account for the trouble with the economy and the stock market. The trouble comes from the bubble, as I have pointed out frequently. It is this third and last provocation for a rally (just another packaged excuse for the proverbial "second-half story") that I intend to fade with a vengeance. But depending on what happens to the other two, I will essentially fade any subsequent rationalizations there as well.

So, this is a rather complex, tri-pronged picture. Given that complexity, I don't agree with many in the bear camp who believe that the overwhelming expectation of a rally will prevent it from happening. (If stock prices were cheap, I would be wildly bullish right now.) I do, however, agree that the more people who expect a rally, the less dynamic and the shorter it will be, so buyers beware. It isn't knowable yet how this will all play out.

Humvees and Hummus: The length and magnitude of the war rally will be dictated by how events unfold (and how well discounted they already are), with respect to the three points I discussed. Whether it's measured in minutes and fractions of percentage points, or weeks and handfuls of percentage points, is also not knowable at this moment in time. In any case, I hope that framework will provide some food for thought over the next few weeks as people chew on where and when they should sell into the rally that I anticipate.

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William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for TheStreet.com and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital had no positions in stocks mentioned, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of TheStreet.com. While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to [e-mail].