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Following a day of countertrend action in stocks and the dollar Monday, the primary trends reasserted themselves with a vengeance early Tuesday.

As of 2:24 p.m. EST, the

Dow Jones Industrial Average

was down 1.3% to 8000.53 after having traded as low as 7935.12. The

S&P 500

was lower by 1.5% to 847.01 vs. its earlier low of 840.19, and the

Nasdaq Composite

was off 1.6% to 1302.40, but up from its nadir of 1292.20.

In currency trading, the U.S. Dollar Index was down 0.74 to 99.16.

Weakness in the greenback and losses for European bourses following a warning by French telecom giant

Alcatel

(ALA)

led stock futures lower in preopen trading. After opening sharply lower, major averages kept skidding until bottoming (thus far) at about 11:30 a.m. EST amid more negative corporate news from firms such as

American International Group

(AIG) - Get American International Group, Inc. Report

and

TheStreet Recommends

Genzyme

(GENZ)

, as well as ongoing geopolitical concerns.

AIG announced it was taking a $1.8 billion fourth-quarter charge to boost its claim reserves, and was lately down 9.1%. The announcement rippled through the insurance and financial services sector, with other industry leaders such as

Citigroup

(C) - Get Citigroup Inc. Report

and its

Travelers Property & Casualty

(TAPA)

unit,

Chubb

(CB) - Get Chubb Limited Report

, and

Ace Ltd.

(ACE)

down in sympathy.

Meanwhile, Genzyme was down 7% after giving conservative guidance for 2003. The Amex Biotech Index was lately off 2.9%.

On the geopolitical front, tensions remain high ahead of Secretary of State Colin Powell's planned address before the U.N. Security Council Wednesday. Meanwhile, Powell was meeting with China's foreign minister Tuesday as tensions with North Korea continue to intensify. President Bush said the U.S. is not planning military action against the Communist regime, despite an ongoing buildup of U.S. personnel and materiel in the region.

The combination of geopolitical concerns plus weakness in the dollar and stocks helped send U.S. Treasuries higher, while gold soared to its highest level since November 1996. Of late, the price of the benchmark 10-year Treasury note was up 8/32 to 100 10/32, its yield falling to 3.96%. Meanwhile, gold was up 8.3% to $379.90 (more on this later today).

Piling On

Monday night, I wrote about the growing number of market players who believe the concerns about war with Iraq is, in the words of one, a "red herring" to explain recent weakness in the dollar and U.S. stocks. That camp continues to grow.

"War isn't the only source of market and economy ills, so lifting the fog of war won't cure them," Richard Berner, U.S. economist at Morgan Stanley, wrote in a report published late Monday.

Uncertainty is "the enemy of growth," Berner agreed. But he doubted that removing the uncertainty related to war "will prove an elixir for markets and the economy" as optimists contend, writing: "Financial restraint, a weak global economy and a mini-energy supply shock are all hurdles to acceleration."

Notably, Berner has been the "optimistic one" at Morgan Stanley, at least relative to global economist Stephen Roach.

"Ultimately, we have factored into the market a very swift and efficient Afghanistan-type war,

one that's quick and dominated by Allies, with an opponent who's fairly inept," added Philippe Bonnefoy, who runs a $500 million fund of funds for Commerzbank Securities. "We're assuming a successful conclusion to war -- but that doesn't translate into

businesses immediately ordering new stuff."

Then there's the question of what happens if war with Iraq doesn't go as smoothly as expected. "No one has discounted the possibility of urban guerilla warfare," observed

RealMoney

contributor Howard Simons. "The type of warfare in which the highly mechanized army loses all of its advantages of mobility and firepower."

Simons' comments came amid a discussion in

RealMoney's

Columnist Conversation this afternoon about the level of fear, or lack thereof, in the market.

More Fearful

Of late, the CBOE Market Volatility Index was up 8.8% to 36.96, a sharp rise in implied volatility and evidence of rising fear. However, the VIX had yet to eclipse 40 -- its intraday high on Jan. 27 was 40.89 -- even as major averages sank to their lowest levels of the year earlier in the session.

Similarly, the CBOE Nasdaq Volatility Index traded as high as 48.90 Tuesday morning vs. its year-to-date intraday high of 49.53 on Jan. 2, when the Comp was trading closer to 1400 vs. 1300. Of late, the VXN was up 4.3% to 48.02.

On the other hand, the 1-day Arms Index spiked over 4 at the open vs. Monday's close of 0.92 and was lately trading at 2.14. Similarly, the CBOE put/call ratio was solidly above 1.0 after trading as high as 1.77 earlier, indicating heightened demand for defensive puts vs. optimistic calls.

Relatively speaking, fear is on the rise. But sentiment indicators remain far from extreme levels, and it seems most traders are talking about the potential for a tradeable bottom (not the final, ultimate one), as opposed to expressing concern about the potential for losses to accelerate.

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.