Progress on the military front stalled this week, and so did the war-related rally. The bulk of the selling occurred Monday, but the stock market drifted slowly and inexorably lower thereafter.

For the week, the

Dow Jones Industrial Average

fell 4.4%, while the

S&P 500


Nasdaq Composite

declined about 3.6% each.

The most obvious cause of the setback was the growing acknowledgement -- including by

administration officials -- that removing Saddam Hussein's regime is proving more difficult than forecast. Allied forces encountered stiffer-than-expected resistance from Iraqi forces, most notably near Basra, while inclement weather and a need to resupply and reinforce previously fast-moving units inhibited a full-out assault on Republican Guard forces on the road to Baghdad.

From a pure military standpoint, the war is proceeding

on schedule and a positive outcome remains assured, experts say. But prior to this week, the perception among many Americans, including many traders, was that the war might last weeks, if not hours. Now, the endgame appears more likely to be measured in months. Such realization, and reports of the first major allied casualties and POWs, helped trigger Monday's

sharp selloff.

On a more fundamental note, the week's economic data included declines in consumer confidence to the lowest levels since late 1993, as well as drops in both existing and new home sales, and durable goods orders. Among the positive data points was a sharper-than-expected drop in weekly jobless claims, but the four-week moving average is still a relatively high 423,000. Also, the government reported corporate profits rose in the fourth quarter for the first time since 2001's final stanza.

The Economic Cycle Research Institute's weekly leading index rose to 120.6 for the week ended March 21, from 118.1 the prior week. The index's six-month growth rate also rose but still remains a negative 1.3%.

"We are not out of the woods yet, and these gains in the index need to be reinforced in the coming weeks," commented ECRI managing director Lakshman Achuthan.

Meanwhile, the corporate news was tilted toward scandals such as at


(HRC) - Get Report

, and disappointments from firms such as


(KMT) - Get Report

, which fell 8.3% Friday. (More positive stories included


(S) - Get Report

, which plans to sell its credit card unit, and airline stocks, which appear on track to receive some much needed government aid.)

Finally, oil prices rose 9.7% for the week and back above $30 per barrel after a British air marshal told reporters it will take "about three months" to start exporting Iraqi oil again. There's also rising concern about Nigeria, where Ijaw rebels occupy key oil-production facilities.

Given all that, the stock market's declines could have been worse, especially given the magnitude of the prior week's advance. As discussed

earlier, the relatively mild retreat has encouraged some market participants.

"It was a very orderly consolidation," said Fred Wynia, a veteran technician and strategist at The Seidler Cos., a Los Angeles investment banking and brokerage firm. "Volume was very light the last few days

and that's constructive."

Indeed, daily trading volume ranged between 1.2 billion and 1.3 billion shares this week vs. 1.4 billion to 1.8 billion the prior week.

Beyond this week's action, there's "stability in all capitalization portions" of the market (i.e. big-, mid-, and small-cap), Wynia said. Therefore, "the market works its way higher, assuming no disaster" on the war front, he said, while conceding "there will probably be no runaways because the economic background is not terribly constructive."

The strategist declined to discuss specific stocks but recommended traders take positions in exchange-traded funds with, the

Merrill Lynch Semiconductor Holders

(SMH) - Get Report


Biotech Holders Trust

(BBH) - Get Report

, and

Oil Service Holders Trust

(OIH) - Get Report

his three favorites.

Techies vs. Fundamentals

By Wynia's own admission (see his comment about the economy) bullishness today is based mainly on technical analysis, which he believes always leads the fundamentals. "The market is always selling on the basis of the perception of reality," the strategist said. "That perception can be wrong or change

but it knows all the negatives that are out there."

Ike Iossif, president of Aegean Capital in Chino Hills, Calif., no stranger to chart reading, offered another perspective on this ancient debate between technical analysis and fundamentals.

"Unfortunately, as the technicals have gotten more positive, the fundamentals have gotten more negative," Iossif commented recently at his firm's Web site,, and later at Carl Swenlin's Decision Point.

In July 2000, May 2001, and March 2002 there were similar developments of positive technicals and weakening fundamentals, Iossif recalled. "In all three cases, the fundamental side of the equation turned out to be correct, and price along with the technicals ultimately turned down." (His assessment of the fundamentals is based on a proprietary "Master Indicator" that includes the aforementioned ECRI weekly leading index and a host of other economic inputs.)

The hedge fund manager's suspicion, one shared by a number of market participants, is that "the market

at least its bullish elements once again will prove to be infinitely foolish, instead of infinitely wise."

Clearly, the safe course is to eschew stocks, which retail investors continued to do in February, taking $10.6 billion out of equity funds, the Investment Company Institute affirmed this week. Despite a big rally prior to this week, inflows into equity funds were just $2.1 billion for the week ended March 19, up from $300 million the prior week, AMG Data reported.

Staying away from stocks has been prudent for the past three years, but history has shown the best time buy shares is often when things look bleakest. They were pretty bleak this week.

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