In case you've been out on the golf course, vacationing with the kids, or simply otherwise occupied, the situation in Iraq has become the primary focal point of the markets over the last few days. Thus, the question of the day is if geopolitics in Iraq will become the next "crisis" the stock market will have to deal with.
As you recall, there have been at least a couple false starts in the "crisis" category already in 2014. First, there was the emerging markets currency "crisis" in January as an overbought, over-believed, and potentially over exuberant market was treated to worries about money flowing out of some emerging market countries. But, after about 8 trading days, this "crisis" soon fizzled and the S&P 500 moved to new all-time highs soon thereafter.
Next came the "crisis" in Ukraine/Russia. Recall that after 25 years of being part of Ukraine, the people of Crimea decided that they wanted to return to Mother Russia. The worry here was that Putin would continue to annex new real estate and WWIII would soon follow. To a certain degree, this "crisis" is still with us today as this morning's headlines point to new tensions over payment for natural gas flowing to Ukraine. However, the bottom line is that the S&P is only 4 days and 0.77 percent removed from the most recent all-time high.
And now... it appears that it's all about Iraq.
Here's the Latest
The al-Qaeda-backed group ISIS has taken control of multiple towns in the north and is reportedly moving toward a showdown in Baghdad. Over the weekend, there have been reports that the Sunni insurgents have killed up to 1,700 Iraqi soldiers and the U.S. State department is starting to evacuate personnel from the embassy, which, is the largest U.S. diplomatic post in the world.
Cutting to the chase, it appears that Iraq is once again on the brink of civil war and given that (a) Iraq produces a fair amount of oil and (b) the U.S. has a history of jumping into the country militarily, the question is if a new war/crisis is brewing.
Perhaps the best way to determine if the markets truly care about a given topic at any point in time is to check in on the charts of various asset classes and "listen" to the message.
So, let's go to the charts. First up is the stock market itself...
S&P 500 - Daily
As far as the S&P 500 is concerned, the bottom line is that before the buzz about Iraq began, the market had broken out into a new leg higher and had just completed hitting a series of fresh all-time highs. The joyride to the upside had produced an overbought situation and an environment that was vulnerable to bad news.
The key is that stocks were "ready" for a pullback, a consolidation, or simply a pause that refreshes. As such, the news in Iraq gave the bears something to focus on.
Next up is oil...
U.S. Oil Fund (USO) - Daily
Conflicts in the Middle East are always about one thing and one thing only: oil. Therefore, whenever you are looking to determine if developments are important to the financial markets, you need look no further than a chart of oil. In this case, the chart of the U.S. Oil ETF will suffice as it is available just about everywhere for free.
From a short-term perspective, it is clear that oil has been movin' on up since the low seen in January. In addition, there has been quite a spike over the last week. Thus, oil would appear to be concerned that things are indeed heating up in the Middle-East.
U.S. Oil Fund (USO) - Weekly
However, from a longer-term perspective - this chart plots the price of the U.S. Oil Fund weekly back into late-2006 - you can see that oil has yet to break above the range that has essentially been in place for more than 5 years.
Now let's check in on gold (via the SPDR Gold ETF - GLD) to see if traders around the globe are seeking shelter in the yellow metal...
SPDR Gold (GLD) - Daily
Although the price of the GLD has clearly perked up over the last 4 days, it is also clear that this security remains in an intermediate-term downtrend that has been intact since early-March. So, to see if there is more to the story, let's look at to the longer-term picture.
SPDR Gold (GLD) - Weekly
The weekly chart of the GLD ETF makes the case that investors are clearly not panicking into gold at the present time. In short, there hasn't been any meaningful advance in the price of gold. And if this was a real "crisis," we would expect to see the GLD popping to the upside.
Next up are the ultimate "safety trades" - U.S. bonds and the dollar.
10-Year U.S. T-Note Yield- Weekly
One could argue that the weekly chart of the yield on the U.S. 10-year shows that yields are falling. However, look closely at the chart - you'll note that yields have actually increased over the last couple week. And this is the exact opposite of what would be occurring if a real crisis were at hand.
PowerShares U.S. Dollar (UUP) - Weekly
The same story can be told using the chart of the U.S. dollar ETF (PowerShares U.S. Dollar - UUP). When traders around the globe really get nervous, they tend to flock in unison to the relative safety of the greenback. And while this ETF has moved up off of the May lows, this chart simply does not suggest that a panic of any kind is underway.
Speaking of fear... lastly there is the CBOE Volatility Index - aka the fear index.
CBOE Volatility Index - VIX - Weekly
Yes, it is true that the CBOE Volatility Index has moved up a bit over the last three days. However, as the weekly chart indicates, the VIX has also been moving up from the lowest level seen since 2007. So, again, not exactly the stuff that market panics are made of.
The Bottom Line
To be sure, traders and their high-speed computers will be focused on any and all developments in Iraq. As such, the market will likely move on every headline out of the region. And it is safe to say that this will create an increased level of volatility relative to what we've seen lately.
However, after reviewing the key charts, it is also clear that there is very little, if any, panic in the air at this stage of the game. Yes, futures are down again this morning on word that staff is being moved from the U.S. embassy in Baghdad. However, from a big-picture standpoint, this does not (yet?) appear to qualify as a major crisis for the markets.
But it would probably be a good idea to continue to monitor all of the above charts as this situation unfolds. Remember, risk can happen fast in this business!
Looking For Investment Management Help?
If you are looking for help with money management, check out Heritage Capital Management's Active Risk Manager Service - or call Heritage for more information at (630) 250-4700.
ALL NEW: The Next Generation of the Daily Decision system is now available to clients of Heritage Capital. The upgraded system utilizes swing trading and mean reversion strategies during neutral market environments, multiple indices for long positions, incremental moves in and out of the market, multiple managers and multiple strategies - with the overall goal being reduced volatility, fewer and less impactful whipsaws, and a "smoother ride".
To learn more about the "Next Generation" system, Read the Research Report
Looking For Guidance in the Markets?
The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.
The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.
The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.
All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!
Turning To This Morning...
It's all about Iraq this morning. However, there are developments in Ukraine and the Empire Manufacturing Index did come in above expectations. But, the bottom line is the computers will be focused on on the news wires today...
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: -1.09%
- Hong Kong: -0.08%
- Shanghai: +0.74%
- London: -0.43%
- Germany: -0.36%
- France: -0.64%
- Italy: -0.97%
- Spain: -1.21%
Crude Oil Futures: +$0.18 to $107.09
Gold: +$7.40at $1281.50
Dollar: higher against the yen and euro, lower vs. pound.
10-Year Bond Yield: Currently trading at 2.586%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -2.41
- Dow Jones Industrial Average: -23
- NASDAQ Composite: -2.36
Thought For The Day...
"Every minute you are angry you lose 60 seconds of happiness." -- Unknown
Are you getting all the market research you need?
Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:
Our Mission Statement:
At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.
Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.
Follow on Twitter: @StateDave
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.