BOTECHS AND INSURERS LEAD MARKET DOWN -- WHY THIS IRAQ WAR IS DIFFERENT FROM THE LAST ONE
INSURERS FALL HARD... Earlier today we showed the collapse in American International Group to a new seven-month low on very heavy volume (AIG was the most actively-traded NYSE stock). Other insurance stocks were caught in the AIG downdraft. Chubb fell under recent support to a new 52-week low on increasing volume -- not good. St. Paul fell to a three-month low on rising volume. ACE fell on volume and is threatening its October low. As a result, financials were the day's biggest losers. Biotechs also had an especially bad day.
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BIOTECHS BREAK DOWN... The Biotechnology Index fell under its December low to the worst level in nearly four months. Two of the biggest biotech losers are charted below. IDEC Pharmaceuticals fell to a seven-month low. Millennium Pharmaceuticals was even weaker -- falling to a new 52-week low on the heavest volume in a year. [Although not shown, Genzyme fell under its 50-day average on heavy volume].
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OIL LEADERS... Oil stocks jumped along with the price of crude today. Two of the day's energy leaders were Nabors Industries and Sunoco. Nabors has moved above moving average lines -- on rising volume -- and is nearing a challenge of its fourth quarter highs. Sunoco closed over its 200-day average -- also on rising volume.
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NEWMONT MINING NEARS BREAKOUT... Gold prices advanced over $8 today to reach the $380 level. Earlier in the day we showed gold moving up toward our $400 target. As a result, gold stocks were the day's strongest group. [A weak stock market and a falling dollar helped are bullish for gold]. NEM moved up on rising volume today and is nearing a test of chart resistance near 31. That's a very important resistance area. Its monthly chart shows why. Chart 10 shows that the area from 30-32 has marked the top of an apparent bottoming pattern since 1998. Needless to say, a decisive close through the 2002 peak near 32 would represent a major bullish breakout for Newmont. [Last week we showed the XAU forming a "right shoulder" in an apparent "head and shoulders" bottom. Since NEM has the heaviest weighting in the XAU (23%), a bullish breakout in NEM would be a bullish sign for the XAU as well].
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WHY THIS WON'T BE A REPLAY OF 1990... A lot of comparisons are being between the expected war with Iraq and the events surrounding the Persian Gulf War during 1990 and 1991. We've made them ourselves. We don't, however, agree with the conclusion that the gold rally will end (and a new bull market in stocks will start) once the war starts. The two next charts show why. During 1990, gold was in a secular bear market -- while stocks were in a secular bull market (see 1990 boxes). The gold bounce leading up to the war was just a bear market rally. The bull market in stocks resumed once the war started in early 1991. This time, gold has entered a secular bull market (see green circle) -- while stocks are now in a secular bear market (see red circle). We do believe that a resolution of the Iraq situation while likely lead to a pullback in gold (maybe even a sharp one) and a good rally in stocks. We don't, however, agree that major trends will be reversed. In fact, we believe that a sharp correction in gold would probably represent another good buying opportunity. We think current trends in all four markets (the dollar, gold, bonds, and stocks) could be interrupted -- but not reversed. That's why we think some of the comparisons of the current war to the last one are flawed.
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