SPDR S&P 500 ETF Trust (SPY) news: Stock Market Crash Is …
Summary
In Mid-March, when I authored the first article of this same name, I took some heat because of what developed in Crimea and for stocks.
Today, as I suggested it would, the situation persists and is escalating, and I am expanding upon my earlier concerns regarding the economic fallout and geopolitical fire coming.
It is irresponsible to ignore this critical event risk, whether marking to benchmark or facing absolute performance judgment. I expect sanctions to drive counter-sanctions, gunfire to follow gunfire. Sell stocks.
In Mid-March when I authored the article “Why a Stock Market Crash is Imminent,” I caught a lot of harsh criticism within the commentary section of the piece. I attributed it to greed-filled enthusiasm for stocks that would not allow most market participants to see clear and present danger. For most Americans, it’s difficult to see beyond their cul-de-sac to comprehend what the Cossacks are up to and how it affects them. On the slightest note of improving conditions or a situation that would not involve American military action, investors passionately bid stocks back up. And when the main catalyst that concerned me seemed to be overcome, at least temporarily when Russian President Vladimir Putin claimed he had no interest in Eastern Ukraine, I knew greed would push up equities again, and so I authored, Risk On – The Snake in Our Garden Promises Not to Bite. That brought name-calling feedback and pinned the label “flip-flopper” on me. It didn’t matter that my short-term calls accurately paralleled the market trend line. Now that the threat has returned and is better understood, I would like to ask those folks at this juncture, how do you like me now?
After greedily reaching a new all-time high, the SPDR S&P 500 (SPY) gave back a portion of its latest gains. However, it has since recovered a good portion of that lost ground. The fluffier Nasdaq was off by a significantly greater amount, with the PowerShares QQQ (QQQ) dropping deep off its top. It has since recovered ground, benefiting from solid earnings reports from the likes of Facebook (FB) and Netflix (NFLX).
1-Month SPY Chart at Yahoo Finance
Here We Are Again Though
At this point, with Ukrainian forces confronting pro-Russian agitators in Eastern Ukraine as tens of thousands of well-equipped Russian troops practice their craft across the border, I’m again suggesting that investors ought to seek shelter and sell the broader market and the widely followed ETF that tracks it, the SPDR S&P 500. My concern is not limited to military confrontation, though, as I expect Western half-actions to only lead the Russians to counter with their own set of globally destabilizing economic disruptions. The latest commentary out of the Kremlin has confirmed as much (see below). I reiterate that the answer for Ukraine stability is NATO forces on the ground in Eastern Ukraine in large numbers, eventually replaced by U.N. peacekeepers. That’s the only thing that will keep Russia out in my view.
The stock market threat catalysts are clearer now to the once blind, but they are the same ones I mentioned previously. I said Russia would yearn for more Ukrainian territory once Crimea was secured, and it has in my view. I said Vladimir Putin would threaten Europe’s energy supply and the global economy if we continued to press him, and he has since threatened to cease the flow of gas to Ukraine and through Ukraine to Europe without repayment of debt owed by Russian firms and prepayment for future energy supplies. And I said sanctions or words alone would not do the trick to deter Russia’s leadership.
Today, the West is again turning up the sanction heat on Russia and stocks started the day higher Monday on the news. Sell it! After opening a gap higher against Friday’s close, the SPDR S&P 500 was in the red nearing the close. Once word came out about the sanctions, traders bid stocks back up, as if the situation would be resolved. I think nobody on Wall Street understands Putin, or traders who do are simply profiting from the news flow either way. I say if you’re looking beyond hourly trading, sell the market, because Vladimir Putin will respond to the latest round of sanctions in a manner unexpected by the West, in my view. This is not the type of man who backs down to pressure. I’m not alone in this view either; Jim Cramer agrees with me, voicing his concern Monday morning on CNBC, though I couldn’t find a video link for you.
There is one important difference between the tension of April about Eastern Ukraine and March on Crimea, and it is causing the market to take the situation more seriously. Vladimir Putin has pushed far enough to get the attention of NATO and to stir some grumbling about the “historic mistake” Russia could make in Ukraine and the likelihood of bolstered NATO presence in Romania, Bulgaria, Poland no matter what, if not all along the entire Russian border. That’s almost the kind of action I called for in March, when I said troops in Ukraine would be the only way to deter the man who only respects actions and not words, nor sanctions. Finally, it seems the market is beginning to understand that it cannot rationalize for the irrational Eastern leader. President Obama seems to think he can change “Putin calculus,” but I believe he is again mistaken.
Even as S&P downgrades Russia’s foreign currency rating and threatens to take it down further if it brings more sanctions upon itself, Putin threatens to rebut Ukrainian action on separatists. I do not expect Putin to back down against the West’s greater sanctions, but instead to look for counter actions to strike pain on Europe and the United States. Its foreign ministry has already stated as much regarding the “unfriendly” actions of the West. Russia threatened to place similar sanctions on Americans and American businesses. Even as Europe shies away from sanctions and as its economy recovers, I would sell the euro and the dollar, and buy gold again and the ETFs tracking it like the SPDR Gold Trust (GLD), while reiterating my sell call for stocks broadly and the SPDR S&P 500 and other passive market bets.
I believe we can also expect Russia to boost shipments of defense goods to nations like Iran, Syria, North Korea and Venezuela, which would be a direct snub to some of the latest sanctions against Russian weapons shipments. While Russia may not be able to sell guns to civil state allies of western powers, it will still sell those goods elsewhere because no western power is going to attempt to stop a Russian shipment. Thus, I see this sanction as only escalating tensions and raising the geopolitical heat. And why does the West expect Russia to act civilly? Is it out of the realm of possibility that Russia, a nation that sells to Syria’s Assad and the United States’ sworn enemy in Iran, would not also sell to terrorists to spite the powers opposing it in Ukraine? Let’s recall the resume of Russia’s current leader, if we still think our counterparts will mow their lawn like we do in the cul-de-sac.
At the moment, Russian troops sit at the Ukraine border, while what appear to be Russian commandoes posing as Ukrainian separatists stir trouble. And with OSCE observers taken hostage, who is to say otherwise? It seems Russia is creating the need for it to send intervening troops into Eastern Ukraine, same as it did in Crimea. It would be for what it will say is the stabilization it wants to bring to the land and to protect pro-Russian people there. The propaganda machine is running at full steam; this week, a crowd stormed a television media station in order to force the broadcasting of Russian programming and elimination of Ukrainian broadcasts. It is through broadcasting that Russia has effectively convinced its own citizenry and some of the citizens of the Ukraine that they are threatened by the new government in Kiev. It is for this reason some welcome Russian troops in Ukraine and do not understand Western reasoning.
So, it should be clear that Russia will eventually violate that line drawn by the West in the sand and roll tanks and push troops into Eastern Ukraine. Those troops will be engaged, in my opinion, by Ukrainian forces and the situation will get messy. That would be the straw that broke the market’s back, which I believe would send the SPDR S&P 500 and other issues in the NASDAQ and the Dow Jones Industrials (DIA) downward.
More importantly to traders though will be the economic push-back Russia applies against Western interests. Russia’s ability to endure suffering has been etched in history. It is a prideful nation full of tough people who already well know suffering. But what happens when Russia shuts down every American business operating on Russian and pseudo-Russian soil? What happens when Russia disrupts societal progress and returns to a cold war mindset and gathers its own set of allies to fuel a separate economy. That kind of global disruption the market is not prepared for, in my view.
So far, it appears we will not go there, with sanctions not extending into major industry like energy, but in doing so, we have shown Putin how to counter us effectively. He has the intestinal fortitude and pride to choose a route we least expect. Russia’s Minister for Foreign Relations, Sergey Ryabkov, said this, “A response of Moscow will follow, and it will be painfully felt in Washington D.C.” You can be sure Vladimir Putin is dictating that line of thinking. Today, business writers are beginning to explore what companies might be impacted by Russian push-back against American interests. The first I’ve seen was this story about Exxon Mobil’s (XOM) $900 billion interest in the Russian arctic. As the market begins to contemplate these things, we should see it give back its latest gains and some. Ignoring the situation is irresponsible portfolio management, whether marking to benchmark or facing absolute performance judgment. I’ve taken to using the volatility ETNs, including the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and derivatives. It has been a losing proposition over the last day or two, but Russia has yet to respond to Western sanctions.
I view the momentum names as canaries in the coal mine. They are the most vulnerable and they have given up their vulnerable ground first. I believe that this is why even after reporting strong results, Facebook and Netflix have since backed down. Facebook, which jumped back up to $63 after reporting its earnings result, now trades at approximately $57. Netflix, which soared to $373, is now trading at about $316.
I see a small window here for investors to hedge against this so far slow moving event risk. Keep in mind that furious wars tend to rise out of the ashes of slow burning embers like this. I’m on the record again against a cul-de-sac investor mindset that points to long-term stock market charts and ignores the dips and dives within them. As our society has progressed, our tribal tendencies have faded somewhat in some countries, but the global population is progressing at varying paces and to different degrees of prosperity and development. Unfortunately, we have continued to develop weaponry and have advanced the killing efficiency and magnitude of our weapons significantly. And we have gone a step further and shared those weapons across a wide swath of people and nations. We can ill afford another world war because of this. The hour calls for great wisdom, and I’m not sure it exists widely enough to preserve civilization as we know it. For now, investors should focus on the issue at hand, and hedge stock market event risk tied to the standoff in Ukraine. Follow me for more of the same discussion.
Source:
Stock Market Crash Is Imminent – Part II: How You Like Me Now?
Disclosure: I am long UVXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)
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SPDR S&P 500 ETF Trust (SPY) news: Stock Market Crash Is …
