The Big Picture | Farewell to Arms II

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Farewell to Arms II

Thursday, April 17, 2003 | 10:44 AM

After a strong pre-war rally, the market is now marking time. The short term oscillators are somewhat overbought, while longer term indicators – the Arms index in particular – still suggests an oversold condition.

Additionally, the markets have butted right up against key resistance (see chart at right), and after their recent romp upwards, are a bit too tired to mount a serious offensive on those levels. After recent gains, continued market consolidation right here – at the 8250–8550 levels –should be viewed positively. Note that each attempt at that resistance weakens it each time.

This suggests that pullbacks should be bought, unless and until the recent up-trend is broken.

When the news is mixed, observing what investors are focusing on can provide insight into their collective psyche. Ultimately, this is more constructive than their hanging on every Centcom briefing, tactical victory or setback of the war. Since Saddam’s statue came down, investors have focused on earnings (fair to good) and the economy (poor).

This helps to explain the recent action; It’s probably why 3M and Coca Cola stunk the joint up yesterday. They set the tone for the overall markets, despite lots of other good news. One might have expected the positive surprises from Microsoft, Intel, TI, EMC, J.P. Morgan, and Ford to have turned the broader indexes green yesterday; Instead, the focus was on negatives.

So while it’s a welcome change that investors are paying attention to market-related developments, understanding their nervousness is crucial. The focus shifts to GDP, growth, unemployment, federal deficits, and IT spending; Earnings expectations have been set low enough that anything short of horrific is being viewed positively.

With good news being discounted, and nervous share holders quick to lock in profits, it’s advantageous to watch the market’s internals – and they are not so bad.

After the past few years, one can hardly blame emotional investors for selling gains somewhat prematurely. It’s worthwhile to observe that many investors continue to be locked into an overtly emotional money management scheme. Day-trading may have faded dramatically, but undisciplined knee jerk responses to the daily headlines continues unabated.

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Quote: “I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money. - Arthur Godfrey, 1903 - 1983