The drivers of the stock market on Monday were pretty obvious as the situation in Ukraine/Crimea dominated the headlines and overshadowed some pretty decent economic news. However, the real question of the day is if the current geopolitical tensions represent a true crisis or merely a distraction and/or an excuse for the bears to run a few sell algos?
On one hand, it would be fairly easy to dismiss the interactions between Russia and a former Soviet state. After all, no shots have been fired and the Russian occupation/invasion of Crimea seems pretty darn tame so far. But, on the other hand, this could change - and quickly - as there were reports that the Russians had given the Ukrainian forces in Crimea an ultimatum to either give up by today or face the consequences.
The other issue involved is that more than 30 percent of the total energy consumed in the EU is delivered from Russia via pipelines that run through, yep, you guessed it; Ukraine. So, we do have to recognize that there could be an actual economic impact here. For if there is one thing the EU doesn't need right now, it's a big boost in oil prices.
Frankly, it would be easy to go on for cyber-pages about the what-ifs associated with this potential crisis. However, that's not what this column is about. No, our job is to identify and stay on the right side of the market's driving forces. So, again, the key question of the isn't why this could turn into a crisis, but rather if this is turning into a crisis.
What Are the Charts Telling Us?
Since this is the second potential crisis already this year (remember the emerging market currency crisis from January - good times), you should all know the drill by know. As you may recall, one of the best ways to answer the question of the day is to do some inter-market analysis in order to determine if there is a uniform message emanating from the various markets.
So, let's get started.
S&P 500 Daily
To be sure, the S&P had a bad day on Monday. But then again, it was the first day of the month (which have all been down in 2014) and stocks were overbought. And given that there has been a fair amount of discussion over whether or not last week's joyride to the upside represented a true "breakout" on the charts, it was a safe bet that the bears would find a reason to go back and "test" that breakout area.
Thus, one argument (coming from a guy wearing rose colored Revo's, by the way) is that yesterday's decline was merely a pullback to test support. And if you don't get too picky, it can be argued that the test was successful.
Another way to look at this is the current action in the stock market looks very similar to what transpired in the first week of trading this year. Of course, those sporting their bear caps suggest that we are very early in this crisis and that things will surely get ugly from here.
NASDAQ Composite Daily
However, the chart of the NASDAQ suggests nothing of the sort. Frankly, from the NASDAQ's point of view, Monday's decline appears to be nothing more than a run-of-the-mill dip in prices.
Since neither of the stock market charts is terribly helpful, let's move on to bonds, gold, the dollar and the VIX.
10-Year Bond Yield Daily
Okay, now we're getting somewhere. The yield on the U.S. 10-year T-Note is flirting with breaking down to a new low for the year. This is a classic flight to quality move, right?
To be fair, the answer here would have to be, "not exactly." The current line in the sand around 2.60 percent is certainly an important level. However, the move from Friday-Monday does not really smack of panic buying. So, please talk to me when and if yields crack the 2.45 percent zone.
Let's try gold.
SPDR Gold Daily
Now we're talking. The chart of the SPDR Gold ETF (NYSE: GLD) displays the type of "oomph" one would expect if a real crisis was unfolding. And of course, the gold bugs are quick to proclaim that the yellow metal is back and that Gold has rediscovered its long-lost mojo.
However, we should keep in mind that during the last real crisis (the dueling problems of the U.S. debt downgrade and the ongoing Greece/Eurozone credit crisis in 2011) the GLD was over $180. So, while a pop of $15 is impressive, gold could certainly go higher if this situation in Ukraine turns into a real crisis.
PowerShares U.S. Dollar Daily
Above is perhaps the most interesting chart of all - the ETF proxy for the U.S. dollar. In a true flight to quality, traders tend to bomb into the greenback with both feet. Therefore, the primary question that comes to mind when looking at this chart is, where's the spike in the dollar?
Speaking of price spikes that occur during a crisis, the VIX tends to do just that as moves of 75 to 100 percent can take place within a matter of days.
As an example, take a look back at the spike in the VIX that occurred in late January. Boom, the VIX went from 13 to 21.50 in 8 days. And during the first couple days of the crisis-that-wasn't, the VIX popped 41 percent. So, while yesterday's blast of 14.3 percent definitely represented a surge in the so-called fear index, the magnitude of the move wasn't all that impressive.
The Bottom Line
The key takeaway from this round of inter-market analysis is that there does not appear to be a full-fledged panic at this time. However, to be fair, it is early in this particular game. Remember, we only heard the first rumblings of Russia's interest in Crimea on Friday afternoon. Therefore, there is plenty of time for things to turn nasty if the situation worsens.
So for now, the question is whether it is best to panic early - or not at all.
Positions in stocks mentioned: none
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