Weekend reports of guerrilla tactics by Iraqi forces, more allied casualties and some infighting (real or imagined) among America's top brass combined with more lackluster economic data to send stocks and the dollar sharply lower Monday. Conversely, Treasuries, oil and gold rallied.
A combination of technical factors and ongoing optimism about the war helped stem some of the stock market's early weakness -- but only temporarily, until a final-hour swoon assured a decidedly negative session.
After trading as low as 7929.31 shortly after 10 a.m. EST, the
Dow Jones Industrial Average
rose steadily thereafter to about 8070. But the recovery effort stalled badly in the final hour, and the Dow closed down 1.9% to 7992.13, its first close below 8000 since March 14. Following similar patterns, the
finished off 1.8% to 848.18, while the
ended down 2.1% to 1341.20. The U.S. Dollar Index fell 1.16, to 98.80.
It is a tenet of faith among hard-core bears that "the war is not primarily what ails this economy," as Dave Hunter, chief market strategist at
floor brokerage Kelly & Christensen, commented. Monday's session suggests other market participants are starting to come around to this view or, at least, are turning their attention away from the war, even partially. (Notably, Merrill Lynch chief U.S. economic David Rosenberg said his "below-consensus" GDP estimates of 1% for the first quarter and 1.8% for the second quarter "may not be tepid enough.")
In addition to increasing concerns about the war, equity and dollar weakness reflected reaction to the Chicago Purchasing Managers Index, which fell to 48.4 in March, from 54.9 in February and vs. expectations for a drop to 50.8. A reading below 50 indicates contraction in the region's manufacturing sector. Combined with recent drops in other regional survey, the Chicago PMI suggests that the Institute for Supply Management's national index due Tuesday will also be weak.
In addition, market participants reacted to a report from the Semiconductor Industry Association that industry sales fell 3.3% in February. "The recovery in the semiconductor industry that has been under way for more than 15 months appears to have stalled in February," SIA president George Scalise said in a statement. The Philadelphia Stock Exchange Semiconductor Index fell 4.4%.
Along with the weak headline number, the prices-paid index of the Chicago report rose to 62.8 from 54.9. The rise was expected and (rightfully) attributed to higher energy costs, but the combination of weakening/contracting manufacturing plus higher prices hints at a stagflationary environment that few market participants have seriously contemplated.
Of course, one reason few economists are worried about stagflation is the widespread expectation that energy prices will decline once the war vs. Iraq is over. Crude futures rose 2.9% to $31.04 Monday, but one explanation for the stock market's intraday recovery attempt were reports that allied forces are more forcefully engaging Republican Guard positions near Karbala, about 50 miles south of Baghdad. With a "quick" disintegration of Saddam Hussein's regime still a possibility, some traders may have bought on news that the battle for Karbala -- and the road to Baghdad -- is approaching its climatic stage.
Meanwhile, British troops mounted "aggressive raids into the center" of Basra, in the south of Iraq, and were reportedly aided by local citizens, according to U.K. military spokesman. This too temporarily encouraged buyers, as both securing Basra and getting more help from locals are considered keys to the successful prosecution of the campaign.
Beyond optimism about war developments, some technical and month- and quarter-end considerations also contributed to the bounce from session lows. Many fund managers allegedly buy more shares of their favorite holdings at the end a month or quarter in order to help improve their performance for that period. This year, there were also hopes of securing the Comp's first-quarter gains before quarterly statements are sent to retail investors, and of decreasing -- if not eliminating -- the quarterly declines for blue-chip indices.
Those efforts (real or imagined) proved unsuccessful as the Dow ended the quarter down 4.2% and the S&P 500 off 3.6%, while the Comp's quarterly gain was pared to 0.4%.
On the technical front, Monday's lows represented an approximately 50% retracement of the Dow's gains from its intraday low on March 12 to its intraday high on March 21. The 50% level is one that is watched by devotees of Fibonacci. Additionally, there was a lot of discussion about support for the S&P 500 in the 840 area.
Back on March 20, Rick Bensignor, chief technical analyst at Morgan Stanley, recommended that traders be "more aggressive" if the S&P were to pull back into the 835 to 850 area, "the closer to 840 the better." Bensignor repeated that recommendation Monday, calling it a "low-risk entry point."
It appeared that many traders were looking at the same chart patterns (or his advice), as the S&P's initially rallied solidly from its intraday low of 843.68. Following the market's final hour swoon, however, anyone who didn't buy in that 835 to 850 range will get another chance.
For the record, Bensignor commented that weekly closes below 829 for the S&P and/or 7740 for the Dow "would likely get us to throw in the remnants of the bull towel we have been holding on to since the October lows."
True Confessions, Market Style
Monday's setback will very likely encourage the skeptics, including the emailers who accused me of abandoning the bears (if not my senses) for columns late last week that hinted at
A common theme in the feedback was that optimism about stocks now ignores, among other issues, still-high valuations and other post-bubble dislocations, including crippling levels of consumer and business debt; weakening economic fundamentals; the SARS virus; plus the economic and political costs of the war and postwar rebuilding, as well as other geopolitical uncertainties.
I agree and still believe long-term prospects for U.S. stocks are troubling, especially given the history of other post-bubble markets. However, as I replied via email to several readers, that doesn't preclude the potential for impressive short- and intermediate-term rallies within a secular bear market.
Moreover, if I've learned anything doing this job it's that it doesn't matter a whit what I think about the market or where it "should" go. My role is to portray the zeitgeist of Wall Street, and, as I noted last week, when a handful of market watchers who aren't "permabulls" by any fair description start getting more optimistic in unison, that's significant and worth reporting.
Finally, just as bulls ought to consider some less-than-rosy scenarios about the war and the postwar economy and markets -- the action last week and Monday suggest some are -- so too should the bears contemplate what can go "wrong" with their scenarios.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.