When Good News Is Bad News For The Market
by Charles B. Carlson, CFA
Dow Theory Forecasts

There are always at least two sides to every story, and nowhere is that more evident than the stock market. Indeed, seemingly good news may also hold some negative news for stocks.

Take Iraq's agreeing to allow arms inspectors into the country. On the surface, this would seem like a welcome event for stocks. The decision may help forestall military action in that part of the world, and that's a good thing, right?

So why did the stock market sell off following the news? Because the market hates uncertainty, and the agreement to permit inspectors adds uncertainty to the situation by extending out what the market sees as inevitable - war.

Indeed, you only need to go back to the Gulf War to see how the market reacts to pending war. Prior to the war in the Middle East, the market was weak. However, once the fighting began, the market condition improved dramatically. Why? Because without a war, a resolution was unlikely. With war, however, the time frame for a resolution accelerated.

That is probably going to be the case in the current Iraq conflict. Sad to say, but without military action, a resolution will be delayed, and that will remain a problem for stocks. Ironically, war means a quicker resolution, which is what the market wants.

Bottom line: Don't assume the market wants a diplomatic resolution. The market wants a quick resolution, and that is unlikely without a show of military might in the region.

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