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After two weeks of modest gains amid low volume, some traders were apparently convinced the stock market was out of the woods. But optimists found themselves back in the thick of the trees Monday after the U.S. and Britain set plans to introduce a new U.N. resolution asking for "serious consequences" against Iraq for its failure to disarm.

That development and some disappointing company developments, including an accounting scandal at European retailer



, sent major averages tumbling.


Dow Jones Industrial Average

fell 2% to 7858.24, the

S&P 500

lost 1.8% to 832.58 and the

Nasdaq Composite

shed 2% to 1322.40.

Ike Iossif, president of Aegean Capital in Chino Hills, Calif., suggested Monday's setback was largely an unwinding of Friday's gains (which were likely aided by options expiration).

Given the prevailing bearishness among many money managers, "people hedge against something 'good' happening over the weekend, which means they buy going into it," Iossif explained midday. "Nothing good happened over the weekend, so now they're selling."

The fund manager offered himself as an example: "Every Friday I go long the

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to partially hedge my shorts in case something good happens," he said, after exiting the long QQQ position Monday morning at 25.19. The QQQs fell 1.7% to 24.73.

As with the weekend, little "good" occurred on the geopolitical front Monday. No timetable for military action was established in the planned U.S.-U.K. resolution, but White House spokesman Ari Fleischer said a vote is expected "in short order." Meanwhile, President Bush reiterated a vow that "one way or the other, Saddam Hussein, for the sake of peace and the security of the American people, will be disarmed."

Complicating matters, Germany, France and Russia are expected to offer a counterproposal recommending weapons inspectors be given more time. The potential clash in the Security Council heightens prospects of the U.S. taking military action against Iraq without U.N. backing, which is generally considered to be bearish for stocks and the dollar -- at least near term.

The U.S. Dollar Index fell 0.47 to 99.62 as the greenback dropped to a one-month low vs. the yen following the nomination of a conservative monetarist as the new head of Japan's central bank. Toshihiko Fukui is not expected to support policies that would weaken the yen, which is approaching levels where the Bank of Japan has recently intervened to support the dollar.

Worries about war and the dampening economic effects of higher oil and natural gas prices aided U.S. Treasuries. The price of the benchmark 10-year Treasury note rose 11/32 to 100 7/32, its yield falling to 3.85%. Meanwhile, crude futures rose 2.5% to $36.48 per barrel, while natural gas futures soared 38.3% to $9.137 per million British Thermal Units.

Gold futures rose 1.3% to $356.56 per ounce.

Song Remains the Same

Perhaps the most surprising thing about Monday's setback for shares was that anyone was surprised by it. Having returned from vacation, it struck me that very little had changed marketwise (and that I shoulda stayed at the beach): The stock market remains "hostage" to war-related news within the context of a postbubble bear market.

Given that backdrop, recent action has proven frustrating to almost all participants. The Dow has moved at least 1% in six of the past 10 sessions (including Monday's), making it "very difficult for even seasoned traders to position themselves correctly," wrote Alan Newman, editor of

Cross Currents

. "To us, it all spells continuing R-I-S-K in capital letters."

Then again, Newman is famously, perennially bearish with a 2003 target of 680 for the S&P 500.

Meanwhile, technical factors alternatively provide a boost to shares (i.e., last week) or weigh on them.

Picking up where we left off on

Feb. 13, major averages had traded down to some potential support levels. While I was away, the S&P subsequently rallied toward the upper end of its recent trading range near 850, which it couldn't surmount. Similarly, the Dow poked above 8000, which has proven to be a resistance point in recent weeks and again Monday. The Comp has been the strongest major average relatively, but it failed to crack through its 50-day moving average at about 1360 last week and faltered to begin this one.

Meanwhile, both the Comp and Philadelphia Stock Exchange Semiconductor Index entered the week below "downward sloping" 10- and 40-week moving averages, observed John Roque, senior analyst at Arnhold & S. Bleichroeder and occasional

contributor. This negative technical consideration undermines some of the significance of the "Nasdaq outperforming the S&P trade," in his estimation.

Another potentially troubling technical development surfaced Monday as the Dow Jones Transportation Average fell 3.8% to 2017.69 after trading as low as 2013.01, just above its 52-week low of 2008.31, hit intraday on Oct. 10. (Transports were waylaid Monday by a Bear Stearns downgrade of truckers, including

J.B. Hunt Transport

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, which fell 8.1%.)

Dow Theory holds that any significant move by the Dow Industrials must be "confirmed" by the Dow Transports in order to establish a new trend. The question now is will the Dow Industrials "confirm" the Transports' move back to the October lows?

"In a bull market, odds are you'll get a nonconfirmation," said Richard Russell, editor and publisher of

Dow Theory Letters

. But "in a bear market, usually a penetration by one is followed by the other."

In other words, stocks are a long way from the edge of the forest.

Stairway to Losses

In addition to Ahold, which fell 61.5%, most of the company news Monday was tilted toward the negative:

VaxGen plummeted 47.4% after reporting disappointing results for its AIDS vaccine;

Retailers such as J.C. Penney and Federated stumbled after cutting February sales forecasts due to inclement weather. The S&P Retail Index fell 1.9%;

Boeing lost 4% after UBS Warburg initiated coverage with a hold, citing the risk of declining jet orders if war and terror threats continue to dampen air travel. United Technologies , which owns jet engine-maker Pratt & Whitney, shed 2.9%.

Such developments, and the overriding bear market, overshadowed positive news from firms such as


(LOW) - Get Lowe's Companies, Inc. Report

, which rose 5.8% after posting better-than-expected fourth-quarter results and forecasting the same for 2003.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.