This year is the year of the geopolitical surprise. Last week there was any number of pundits, traders, and analysts, whoever they were that gave the markets a free pass. They gave the markets a ‘smooth sails ahead’ signal because they could not possibly see what could go wrong. Europe had negative interest rates, what could possibly go wrong?
Apparently, a lot! It’s just amazing to me that people who have been involved in markets for so long don’t know better or don’t want to know better. Denial is one of those states of mind that will destroy a trading account faster than anything else.
So let me say it again, 2014 is the year of the geopolitical surprise. Back in February/March our first major time window of the year spawned the crisis in the Ukraine. It told me this was going to be a different kind of year. It’s not surprising because this year is the 100th anniversary of the start of World War I. You can’t succeed at financial markets if you don’t have a good understanding of mass crowd psychology. Your best education on mass crowd psychology as it relates to financial markets will be accomplished by reading Prechter’s Socionomics. I’ve said this before but I really believe the man should win a Nobel Peace Prize for putting that new science on the map. You know I don’t say things like that lightly.
So let’s look at 1906 and the San Francisco earthquake. It devastated the U.S. and British economies to the point we had a panic in 1907. The world was never the same and they were embroiled in the Great War only 7 years later. As we learn from Socionomics the degree of mass crowd anger directly relates to the degree of trend of the prior ‘correction’ in the stock market. In our case we peaked as well in 2007 as your author correctly identified autumn 2007 having the potential for the pivot of the decade 7 months ahead of time. I was wrong; it became the largest pivot of our lifetime. The panic so to speak came in 2008.
Here it is 6 years later at the 100 year anniversary of the Great War otherwise known as WWI and the Middle East is as close to going up in flames as it has at any time in my lifetime. This is so complicated that Iran is seriously considering team up with Washington to fight back this threat. If there is a silver lining at all and one has to dig deep for this perhaps Tehran will finally sit down and engage in serious nuclear talks.
The enemy is known as ISIS and last week they plundered the central bank in Mosul for $425 million. To give you an idea, according to the NY Times Al Qaeda was operating under a $30 million budget at 9/11. What that does is make ISIS, the Islamic State of Iraq and Syria the richest terrorist organization in the history of the world. So take the I out of ISIS and you get SS. Do you get my drift? The Iraqi army refuses to fight these guys and who can really blame them? They don’t fight according to the Geneva Convention and we are getting all kinds of atrocity reports. Okay, you can get the details on Iraq in a thousand different places online but I just wanted to shake the last ounce of complacency out of any of you on Wall Street who still believe in smooth sails.
All of this just so happens to be materializing in our second major time window of the year. This surprise invasion kicked in around June 10. That’s right 6.10. Our seasonal change point is always around June 20 and anyone following my work for any length of time probably realizes markets usually turn at or very close to seasonal change points. Last year we had a major low around that time that spawned the rally that has continued until now. But this year we also have a bigger window, its 610 weeks off the Internet bear bottom back in 2002.
I was originally looking for an inversion low around June 20 if we would’ve been lucky enough to catch a high last week but I have to tell you, this is a horse of an entirely different color. I believe I’ve shown this group the charts from back in 1940. I’ve shown you how markets reacted to the Fall of France. From the day the blitzkrieg started the market dropped like a rock and only bottomed around the time the collapse of France was sealed. I may have shown this group the charts from the Czech crisis in 1938 where markets also plunged and only recovered upon Chamberlain declaring "peace in our time." So what does that mean to you? Markets are very allergic to military action.