THEME: SCEPTICISM to COMPLACENCY

"The earnings story is good and is likely to remain very good, and the economic conditions are likely to remain supportive," Blood added. "It's certainly not going to go straight up beyond this period, but I think we're about two-thirds of the way through this correction."

This quote pretty much typifies the reaction of the market to the stock sell-off and terrorism. In Nov. 2003, I wrote about increasing scepticism about the market's rise. Now, people are quite complacent. Also, the initial reaction of the news to the Spanish bombing was pretty mild. The fact that no terror alerts have been triggered since Jan. leads me to suspect that the Bush admin. feels that terror is bad for re-election.

This presents a basic conundrum: is terror good or bad for Bush's re-election?

Common wisdom would suggest good, as the electorate when threatened would err on the side of conservatism. Kerry is an unknown and un-tested quantity as President.

However, my suspicion is that if the administration starts playing the terror card, and the electorate does not believe it is credible, and the economy starts to detiorate because of this, then this is all bad for Bush's chances. I think that Karl Rove understands this and is keeping Tom Ridge on a short leash.

So, what happens?

The problem with this gagging of terror is that if another terrorist incident occurs, then the market will be very surprised. It has been lulled into a sense of complacency.

The most interesting tell about the market is that a year ago, when we had these volatility spikes, people were quick to jump on reasons why NOT to invest in stocks. Now, people are quick to say why NOT to panic and sell stocks.

This means that the market has already begun the bear mode. How long it will last is anyone's guess. Key points to consider:

1. The dollar is recovering which means that earnings stimulus from this has dissipated.
2. Energy prices are higher and people are starting to complain.
3. Lower interest rates may fail to stimulate as few are left to refi.
4. The shocking consumer confidence numbers may be a cry for help from a debt tapped out consumer.
5. The outsourcing debate is gaining steam as Lou Dobb's is scoring major points for his views.
6. Calpine's inability to roll over its debt may mean that the refi boom that gave a second wind to debt laden companies may be dissipating.
7. Technically, the market is long now, and the short-covering stimulus is gone.

THEME: ELECTION CYCLE
Here is a bit of a paradox. People argue that 2004 should be a good year for stocks because of the Presidential election cycle. The idea is that governments will throw every form of stimulus they can at the market to keep it up. The problem with this argument is that it presumes that governments exercise such extreme control of the markets that they can in fact time them. Well, if the governments could actually control markets then whey would we ever have a down year in stocks? I think that people who are falling for this argument are being too complacent.