Beware of the ides of March, or in modern times beware of the news. It is easy to get wrapped into the drama of news and make irrational trading decisions expecting extreme events to occur. If you invest long enough you’ll come to realize that betting on extreme events more often than not leads to disappointing results. Most often when you are correct the payoff does not always make up for all the losing trades along the way. That is why we stress rational thinking here. Would wagering a weeks salary on lottery tickets sound like a good strategy? So how does this apply to the current events?
Last Friday we witnessed a sell off into the close. The news was touting the uncertainty with regards to the referendum in Crimea. Gold spiked up. There is of course some sensibility to this. Part of it is worrying about unexpected events over the weekend. The other has to do with the way those markets have been behaving as of late regardless of the news.
Gold has rallied recently and has broken the $130-130.50 resistance level in the GLD ETF.
This is the kind of behaviour that was discussed at the end of the gold article back in mid February. The link to the article is here. So by now Gold has had its chance in the limelight, if there is no fuel left to propel it to the 136 region it may just come back down to the $130 level. Barring any violence or significant changes in the Crimea crisis, the range for this week in GLD is likely to be $127.40-$135.60. More than likely, because gold was in an action mode before this crisis, expect these ranges to be tested.
The equity market was also at a point of reckoning before the crisis flared up. The S&P 500 reached all time highs at the 1883.57 level and has slid until Monday.
The downward action going into last weekend should have come as no surprise. Being long equities near the all time highs going into a weekend with the Crimean referendum would have been unwise due to the increased probability of a surprise to the downside. Additionally, with the market trading at a slight discount to the recent highs, it would also make sense that there was no reason to be invested since there is still the possibility of catching an upside move.
This is an example of [amazon asin=0393337170&text=”game theory”] at work. If there is a larger than normal probability of some type of catastrophe (still a small probability) versus a 50% chance of maybe reaching the all time high again you could come to the conclusion that it is better to wait on the sidelines. Another way to think about it is to look at the recent drop due to fears in the emerging markets debt markets. The market sold off about 6%. A declaration of war could cause a larger move. On the upside the market is only about 2.3% from the all time high. If you believe your gains could be capped there because of the resistance at that level, then you would be faced with deciding between a 6% loss risk versus a 2.3% gain. The rational thing to do is to skip this game and wait for better odds.
Now comes Monday and the market rallies on what many news outlets call a relief rally on the Crimea outcome? Were traders really doubting the outcome of the election? A coin with two heads is more unpredictable than the outcome of that referendum. Traders were more likely playing the game mentioned above and have been ready to take a breather from the equity markets for a while now. This is how sideways trading happens. What seems like knee jerk reactions tend to be limited when looking at a longer time frame. The end of the week may see the SPY ETF land somewhere between $183.00 and $190.10.
More important to the markets for the rest of the week will be US economic data including the Consumer Price Index and Housing Starts on Tuesday; the FOMC policy announcements on Wednesday; Weekly jobless claims, Philadelphia Fed Survey, and Existing home sales on Thursday. Wednesday can have an effect on markets if the Federal Reserve Board changes it’s “broken record” announcement on the condition of the economy. The other risk is that the usual reduction of its monthly asset purchasing program is increased now (not likely), or in the future at a pace quicker than the current USD$10 Billion pace.
Friday will likely be a repeat of last Friday if the equity market cannot break out of its range and especially if there are fears of unrest in Crimea. Remember the news gives traders liquidity to make the trades that they were already thinking of making. Recognize when the odds are against you.
Good luck and trade rationally.