How will this intense standoff play out in the markets?
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Last week the market took a bit of a step back due to a war of words with North Korea. So far, the standoff with the isolationist country has been intense. However, I think it is important to understand the difference between political risk and risk with the markets.
Historically, vast and wide-sweeping changes to portfolios based on political rhetoric has had a poor track record. That doesn’t mean that there isn’t a risk – as there is always risk when it comes to politics. The issue is that typically it is not the political risk that is a great indicator regarding selling risky assets out of a portfolio.
Looking at the details of where we are today, the market itself is not giving a sell signal.
Using trend line analysis along with a volatility measure, we can look at both the S&P 500 and Russell 2000 to compare large cap US stocks and small cap stocks. This can be useful information when we are looking at overall trends. The reason being that there is evidence that real trends in the markets will be confirmed by the direction of both the large and small cap stocks together. Therefore, when both indexes tell us the same information, it is more likely to be true.
The following chart shows the latest bull-run that began in the winter of 2016:
Top: S&P 500 Bottom: Russell 2000
Green Line: Over-all trend
Confirmed Highs & Lows: H & L
Blue Lines: range with which with index operates, based on volatility
It is important to understand that the trends are largely in-tact. For our technical models, our indicators will become increasingly sensitive as the values drop below the trend line because that may indicate that the trends are changing. We never advocate acting too soon, before our indicators tell us to sell assets, because there are many times that trends are tested before a change in direction is made.
As much as I would love to tell you that this means there is no reason to be concerned, I can’t. However, in the same breath, I am also not saying that it is time to panic. Now is the time to remain unemotional – which can be very, very hard to do.
The risk of a nuclear war with countries deemed to be dangerous has happened, and just as we are navigating this intense political risk, our technical models are sensitive enough to be able to navigate and change course if data warrants it.
The risk of financial ruin is high if we ignore the data and make a “gut” decision, so It is best to make sure you are comfortable with your overall strategy, because a time of crisis is not a good time to change it.
We have seen many market corrections and value run-ups, but data doesn’t currently support that this is the beginning of a market correction. However, this can all change very quickly.
Rest assured that if this does happen, data will support it, appropriate strategy implementation will happen and portfolios will become more conservative. If you act before data confirms the change in direction, you risk falling into a bear trap – a time when you sell into a small downturn which quickly recovers and leaves you sorry for that decision.
The war of words is intense, and it could get worse. However, at the time of this writing, it was still just talk. We are evaluating all of this data daily, and we are keeping a very close eye on this situation and the market affects.
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