As the Ukraine/Crimea crisis escalates, we’ve heard the West is supposed to announce the “cost” to Russia for this incursion into the Crimea on Monday. Although I always anticipate an important news event to materialize on one of our time windows, it never dawned on me we’d get such an important geopolitical event. This one is big, and the takeaway to the whole thing might be a return of the Cold War.
I doubt very seriously the West is going to risk a major war here. It appears the Russians have factored in Western retaliation. Last week, a huge withdrawal was made out of a central bank to the tune of $106.1 billion, and the speculation according to a CNBC report is that it is Russia. The Russians might be pulling funding off shore over concerns of retaliation for the referendum in the Crimea. It wouldn’t be the first time since the Russian based Narodny Bank pulled a huge amount of dollars out of the United States and into their London branch back in 1956 when the Soviets invaded Hungary.
I don’t think the market is going to like this. I’ve shown you this chart before but it’s worth looking at again.
This is characteristic of what happens to financial markets during major geopolitical events. This one was arguably the worst one in the entire 20th century, the invasion and surrender of France to the Nazis in 1940. Our takeaway is similar to what happened in 2011. Markets peaked at the start of the crisis, similar to the Arab Spring, and don’t usually bottom until the outcome becomes a foregone conclusion. Since the Russian Duma doesn’t actually vote on annexing the Crimea at least until the end of the week, there’s a chance this could be an old-fashioned major shake of the trees.
Markets have peaked in this window, but even as the VIX has turned up, the usual fear and trepidation is missing. Too many people still view the market as business as usual. Even Warren Buffet announced he was a buyer. Don’t be fooled by Mr. Buffet, none of us have that kind of staying power. Remember he bought halfway through the financial crisis in 2008 and lived to tell about it. This guy probably has more money than a major U.S. city. He’s probably the only one in the entire country who can afford to dollar cost average. For the rest of us, we need to wait until the fear level gets so thick, the headlines come bursting through the television.
Here’s the VIX(CFE:VI) coming into the new week, and it’s as high as it's been recently. Without fear, the potential is for it to get a lot higher. I’ve been banging the table for well over a year that we need to see a reading near 30 to get a real sustainable move. At least I’m in good company. This week it was none other than Marc Faber who said equities are vulnerable to a 30%-40% hit, simply because we haven’t had a real correction since 2011. He’s right, of course, but most people you listen to in the media won’t tell you that. It's human nature to project the next 12 months based on the prior 12.
Remember, it was a handful of weeks back when I brought the powerful looking green move in the SOX to your attention? I told you at the time I was going against my own methodology of believing strength would hold and believing for the potential that whoever it was that bought in February could end up being part of a huge bull trap? The SOX isn’t there yet, that kind of trap takes time to develop, but here is at least one semi stock that is headed in that direction.
Wisdom is knowing when to follow the rules and when to seriously consider the exception to the rule. This is one of those times, as we are not in a normal market. Don’t let anyone fool you; we’ve been working these market cycle points for the past 15 years, and if you forget everything else I tell you, remember that when cycles complete, they end hard.
You won’t find many bullish sequences like the one we just had. If I had my druthers, we’d have peaked in January and stayed down until now. It would have set up a tremendous buying opportunity. As it stands, for that tremendous buying opportunity to still materialize by the beginning of next week (the end of our time window season), this will have to be a monumental bear week. Fear will have to build as the market drops, if it indeed does drop. This is not a prediction, but for the market to give us the proper buying opportunity, it needs to make up for lost time in February. For the life of me, I can’t understand who was actually buying in the past month. Who buys with big money when the VIX is so low? I will tell you who. It’s those who didn’t buy when they should have and are now chasing performance. That’s why stocks like Altera are developing bull traps. While most semi stocks don’t look that bad yet, if you go around the horn of the entire market you’ll find plenty that are in an advanced state and others in trouble of severe technical damage. Have you seen the HGX lately?
Next page: Monumental implications...