Many people blamed the market’s slide on the horrific bombings in Madrid last week. We believe Investors who adopt this approach risk making a serious mistake with their investment capital. Its wrong to assume Thursday’s attack was the primary cause of recent weakness – especially when considering when so many prior attacks have been “shrugged off” by the Markets. There have been repeated fatalities in Iraq throughout the second half of 2003. Many assaults by insurgents have exacted a heavy toll on U.S. servicemen. A bombing attack on a mosque killed at least as many people as the Madrid 3/11 tragedy.

While the Middle East and Europe are very different in their economic/strategic relationships with the U.S., the point remains: Market factors dictate the response to the news, and almost never the content of the news itself. We’ve seen this in response to both good and bad earnings reports, and both weak and strong economic reports.

Specifically, reaction to news is contingent upon many forces in place long before that news breaks. Market Trend, money flow, technicals, internals, cycles, sentiment and valuation are all far more important than just about any external event. This has been shown time and again, from Pearl Harbor to JFK to 9/11, and now to Madrid’s M-11.

Certainly, headlines will temporarily impact markets, but our research suggests these responses are short lived. The entire capital markets have been simply too large for any one event to impact them permanently. (We hope this continues to be the case going forward).

The most recent weakness, which we have been discussing since late January, is the result of technically deteriorating conditions of the major indices – not headlines. Money inflows have been slowing: We have entered a seasonal period with far less positive catalysts. While none of these are fatal to the rally, the Markets have been ripe for a pullback and consolidation, and now one is here.

One final technical note: The previously reliable ARMS index has not been its usual stellar self. Throughout 2000-03, it has given several false signals – enough so that TRIN creator Dick Arms has re-jiggered his measure of it. We mention this because the Arms index 10-day MA was over in 2.3 three days in a row last week. In the past, two days in a row over 2.0 would be enough to get us very excited. Only once has it been over 2 on 3 days on a row (9/14/53), right before the Dow rallied 90%. I am less sanguine on this recent signal indicator given the TRIN’s recent, somewhat blemished, track record of the past 3 years.

Category: Finance, War/Defense

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