As we watched the Sunday morning political shows yesterday, we could not help but notice how so many geopolitical and military experts focused on the airspace over Ukraine. Sure, they talked about the “no fly zone” issue, but what struck us most was the emphasis on helping the Ukraine’s military get jets/fighters so that they can battle the Russians over the dominance of the air space over Ukraine. These experts also spent a lot of time talking about getting the Ukrainians the kind of weaponry that can do a better job at shooting down Russian fighters……The reason we thought these conversations were so interesting is that they are ones that take place with people are expecting a drawn-out war…not something that is going to die down over the next few weeks (or even months).

There is little question that most other markets believe that this crisis is not going to go away any time soon. Crude oil, gold and credit spreads are much higher than their January highs…and bond yields, as well as European and Asian stock markets, are all lower than their January lows. In fact, they’re all equal to or lower than their February lows as well. HOWEVER, the S&P 500 index remains above both its January and February lows. In other words, even though sentiment has certainly turned much more bearish this year, those who invest in U.S. equities seem much less concerned about the situation in eastern Europe than most other investors.

Of course, some of this makes sense. The U.S. economy is not being impacted by this crisis to the same degree that Europe is so far. Also, U.S. equities could be seen as a “flight to quality” in this uncertain world. However, at some point, the downside potential for U.S. stocks could become more pronounced in the coming weeks if this crisis does indeed become one that seen as a longer-term issue. In other words, the U.S. stock market will likely have some catching up to do with other global markets once it becomes even more evident that the crisis in eastern Europe will be a prolonged one.

Let’s face it, if “stagflation” continues to become a bigger concern, the U.S. is not going to be able to avoid its negative effects. We already have many firms on Wall Street lowering their guidance for global GDP growth…AND for U.S. growth as well……We don’t know if stagflation will become the same kind of problem that it did in the 1970s, but we DO know that this problem tends become a big one when inflation is drive by a lack of supply…rather than an increase in demand (like it did in the 1970s…with the oil embargo). Demand driven inflation is not a problem. It’s when the inflation is driven by a drop in supply that the situation becomes problematic…because it creates demand destruction.

Switching gears, we’d like to highlight the semiconductor group this morning. This all-important leadership group is one that actually IS testing its lows from both January and February. This presents some significant problems for this group on a technical basis. The SMH has already broken well below its trend-line from the March 2020 pandemic lows. If it now breaks below its lows from January and February (of 255), it is not only going to give it a key “lower-low,” it’s also going to take it below the “neck-line” of a “head & shoulders” pattern…..Of course, we’ll need a meaningful break below 255 to raise red warning flag (not just a slight break), but if we see any material weakness in the chip stocks this week, it’s definitely not going to be good for them on a technical basis. Given that the semis are such an important leadership group for the broad stock market, a significant breakdown in the chip stocks will not be good for the rest of the stock market either.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com

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