Market Discouraged at Home<BR/> and Abroad - TheStreet

Dashing hopes for a follow-through to Tuesday's intraday reversal, stock proxies drifted downward Wednesday, ending not far from session lows.

The

Dow Jones Industrial Average

closed down 1.3% to 7806.98 after trading as low as 7793.89 in the session's final hour. The

S&P 500

shed 1.3% to 827.55 vs. its nadir of 826.72, and the

Nasdsaq Composite

lost 1.9% to 1303.70 after trading as low as 1304.50.

Weakness in stocks again benefited Treasuries, where the price of the benchmark 10-year note rose 14/32 to 100 29/32, its yield falling to 3.76%, its lowest level since Oct. 10.

Developments apparently contributing to the stock market's decline included United Nations chief weapons inspector Hans Blix saying Iraq "could do more" to cooperate with inspectors but that "even if Iraq would cooperate immediately, actively and unconditionally with us, we would need several months."

Oil jumped in reaction to those comments as the Bush administration seems highly unlikely to let the status quo continue for several more months. Crude futures rose 4.6% to $37.70, their highest close since October 1990.

Some oil service names such as

Halliburton

(HAL) - Get Report

benefited from the latest rise in crude prices, but major oil producers continued to languish. The Amex Oil & Gas Index dipped 0.2%.

On the micro front, much of the chatter was about

Hewlett-Packard

(HPQ) - Get Report

, which tumbled 15.3% after posting disappointing fiscal first-quarter revenues and offering lackluster guidance for the rest of 2003.

H-P was the second-most actively traded stock on the

Big Board

and the biggest drag on the Dow, followed by

IBM

(IBM) - Get Report

and

United Technologies

. In some regards, however,

Microsoft

(MSFT) - Get Report

best embodied the session, or at least the market's current state. Despite an upgrade by Deutsche Bank to buy from hold, shares of the software colossus fell 2.7%.

The Comp, which has been the strongest major average this year, was relatively weak Wednesday, a performance echoed by other tech gauges. The Philadelphia Stock Exchange Semiconductor Index fell 3% while the Morgan Stanley Technology Index lost 2.6%.

Trading volume was sparse and market breadth decidedly negative, suggesting a lack of confidence among traders that

Tuesday's session meant anything more than a flurry of a few hours. There was some excitement early on after

Investors Intelligence

reported bullish sentiment fell to 40.4% from 41.6% while bearish sentiment rose to 36% from 33.7% in its weekly sentiment survey.

In Big Board trading, 1.3 billion shares were exchanged -- vs. nearly 1.5 billion the prior day -- while declining stocks bested advancers 19 to 12. Over the counter, about 972 million shares changed hands -- only the third sub-billion share session of the year -- while decliners led 19 to 12.

"The sequence of declines and advances has attracted the right directional volume, as price increases tend to coincide with positive moves

in volume and declines in price

occur on volume contractions," observed Jeffrey deGraaf, chief technical analyst at Lehman Brothers. "It's comfort

for those long, but there have been few signs of confirmation that meaningful directional change is upon us."

How Low Can You Go?

The session reinforced the notion that equities are stuck in limbo and are likely to stay there until there's clarity on the economic front, which probably won't emerge until after uncertainties about the situation with Iraq are removed. What's unnerving for traders, investors and financial journalists alike is this state of disequilibrium is likely to remain intact for another month, at least.

Assuming the Pentagon will time any attack on Baghdad with a new moon, the next "windows of opportunity" occur Feb. 27-March 6 and then March 30-April 4 (thanks to

RealMoney.com's

resident astronomer Scott Reamer.) Further assuming the White House won't authorize an attack until

after

the U.N. votes on the second resolution submitted by the U.S. and U.K. on Monday, it's unlikely an attack will be launched during the Feb. 27-March 6 window.

Of course, it's entirely possible the Pentagon would attack at some juncture other than a new moon, or that Bush would authorize military action before the U.N. votes on the second resolution, likely in mid-March. But according to Tradesports.com's futures market on political events, there are currently only about 25% odds Saddam Hussein will deposed by the end of March vs. more than 60% by the end of April.

(David Edwards took an

in-depth look at the war's probability on

TheStreet.com

today.)

Furthermore, the majority of observers assume that any war with Iraq will be quick, with relatively low casualties among allied forces and civilians, and that the U.S. financial markets and economy will thus rebound sharply.

Fans of

The Odd Couple

know what happens when you assume -- "you make an 'ass' of 'u' and 'me'" -- something to contemplate as we extend birthday greetings to actor Tony Randall, who played Felix Unger on the classic television show.

"We maintain our view that the war is another excuse for the weak economy, but not the root cause," deGraaf commented. "Therefore, it's likely to create little legitimate or sustainable strength in equities, but a swing in sentiment is far more likely and that could potentially provide an ideal environment for more aggressive selling."

In other words, he'd be selling into any knee-jerk rally that's likely to occur if/when the bombs start dropping, which sounds like a good plan.