Saddam and Market Psychology I wrote earlier about the "Iraq Game". Last summer, the death's of Saddam's two sons - Uday and Qusay - tacked on 100 points to the Dow. I speculated that the capture of Saddam would generate a much larger rally than the Uday-Qusay jump; after all, Saddam is the man who started it all. The Saddam rally should be sold, I wrote, and gold bought as the metal would decline upon the announcement. These are all psychological plays, attempts to understand how the masses might react to such news. The results? The Dow tacked on about 130 points when Dow futures opened for trading Sunday evening. Gold declined by about 8 dollars to $401 in Asian trading. Two days later, the Dow has fallen back to Pre-Saddam capture levels and gold risen back to $408. The relevant information to be gleaned from all of this is the comparison between the Uday-Qusay rally and the Saddam rally. See the charts below.
The conclusion is simple. Iraq related news juiced the market by 100 points last summer, but the same sort of news this winter only added 130 points. The market isn't paying attention to Iraq anymore. Good news coming out of the war is being ignored, no longer playing an important part in the psychology of the market. The Saddam rally should have been massive, giving a 200-300 point punch to markets. Hey, this is the Ace of Spades that was just captured! We haven't seen this happen. Given that Iraq has been a fundamental feature of this rally, its growing irrelevance gives one cause to doubt the ability of markets to continue moving higher.
© JPK and Lope
2002