By Arnie Kaufman
Stocks are likely to move erratically until the outcome of the confrontation with Iraq is clearer. The possibility exists, of course, of something going very wrong if war comes. But if the U.S. and its allies realize their objectives quickly and with light losses, the market could begin a sustainable advance.
As indicated by deteriorating upside volume relative to downside volume, institutional investors are now mainly engaged in distribution, or net selling. They were in an accumulation mode in October and November.
With the price of oil rising above $31 a barrel on the strike in Venezuela and the approaching showdown with Iraq, improved economic and corporate news is being obscured.
As the U.S. will bear much of the risk and expense of a war, the dollar has come under pressure. Increased uncertainties have pushed the price of gold to the highest level in more than five years.
S&P chief technical analyst Mark Arbeter says the combination of a breakdown in the dollar and upside breakouts in oil and gold is negative for U.S. stocks. He'd be especially worried if the S&P 500, now 895, fell through support at 860, the point representing a 50% retracement of the rally off the October low.
War fears are neutralizing not only the effects on the market of a modestly strengthening economy, but also the favorable seasonal influences that stocks typically experience around this time. Yearend mutual fund distributions, company contributions to profit-sharing plans, bonuses and extra dividends are used in part for reinvestment in equities. Much of this money apparently is being allowed to accumulate just now.
While Iraq remains the key to market movements in the near term, the improving corporate profit outlook and build-up in cash reserves bode well for stocks down the road. We'd maintain a constructive investment approach.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook