Where The Markets Meet War (SPY,NOC)
There are days to be thankful for, friends. And this is one of them.
For all that we have (and don’t really deserve), we should bend over backward and thank our tormentors. For all that we want and still haven’t gotten (and really don’t deserve, either), hold on a bit. For in the end, there’s little doubt that the greatest of all Supreme Court Justices will bestow upon us our worldly dessert in the most precise and poignant manner.
And may he do so doubly to our enemies!
Revenge and the Making of Foes
It’s hard to figure where the current round of trade wars will end. There are those who posit that we’re fast-tracking toward a military confrontation with the likes of Russia, China and Iran, and whoever else we might end up feuding with (Canada? Mexico?).
And there are those, like the President and his cabinet, who claim that this is simply about protecting American business from an unfair playing field that we, in our unthinking ideological rush for an ill-defined ‘globalism’, created ourselves.
It’s now simply a matter of healing those self-inflicted wounds and restoring thereby our former glory. In the current administration’s view of things, our ‘enemies’ know very well how good they’ve got it and, in the end, will have no choice but submit to the new regime in order to maintain their markets in America.
Maybe they’re right.
But there’s no question it’s becoming increasingly inflammatory out there; no one is taking things lying down. The other side is ratcheting up at least as fast, and in that environment, where uncertainty and a more bellicose tone are dominant, the defense contractors are the ones having a heyday.
A look at the charts for Raytheon, Northrop Grumman, General Dynamics and the rest of their projectile-making ilk shows a group of companies bucking the broad market trend. Each of the above names is up between ten and twenty percent year to date – against YTD declines for the Dow, S&P and NASDAQ.
And if we keep getting tit-for-tat revenge actions from our trading partners, it’s very possible those general trends will continue: war stocks up/general market down.
There are different ways to play that eventuality, of course. You could match the above sectors in a simple long/short manner. You could take the hard asset approach, purchasing gold and silver, as we recently advised you to do, a strategy, by the way, that looks ready to pay off in bundles – gold appears set to break out in significant fashion.
You could also go back to the land, as we’ve likewise advised, buy a plot of land, a small tractor to work that land, a good store of seeds, food and some tools, maybe. We’ve commented aplenty on the importance of at least considering your options in this vein – if you haven’t already done so.
And maybe this brief digression will encourage you…
In its most recent, annual reliability report, the NERC (North American Electric Reliability Corporation), which oversees the country’s power grid, stated that a great part of the country’s electricity supply is vulnerable to both conventional and non-conventional attacks, including an electromagnetic pulse (EMP) attack from a nuclear rival and that governments are ill-prepared to deal with such an eventuality.
As we’ve stated before, an EMP from a nuclear device detonated high over the country’s Midwestern core could disable the entire electricity grid for months, cause 1000’s of deaths and create havoc with supply chains for everything from food and energy to healthcare goods and services, to name just a few.
[HOB – height of burst]
That eight months after electricity was disrupted in Puerto Rico, thousands of people are still without power there. And that’s a limited fallout area – with all the country’s resources available for a rebuild!
In fact, forget the nuclear scenario. The NERC report concluded that the nation’s lack of preparedness for an attack on key infrastructure could render even a crude attack on the grid a major disaster.
In short, the need for an independent source of energy, food, water and defense are crucial in the event of a broader conflict triggered by trade or any other cause.
Let’s now turn to some charts to see how we can make good off such a happenstance.
We start with three months’ worth of the S&P 500 –
The chart is similar to the rest of the broad indexes and shows, in green, the S&P’s last retracement low, set back in February when traders got very cold feet.
Technically, the line is plain for all to see. But a recent note by Nomura Securities’ Charlie McElligott indicates that a great number of commodity hedge funds would turn MAX SHORT if the S&P were to dip below the 2535 level (our green line, above), as an overwhelming number of stop losses are positioned precisely at that level.
Should we see 2535 breached, we’ve no doubt that a firestorm of selling would convene, and, as is the wont of political leaders the world over, the war drums would also likely begin beating – for there’s nothing so distracting as a potential trade of missiles to get people’s minds off their pocketbooks.
We’re also going to hazard that with the war rhetoric spewing in hyperbolic fashion, the defense stocks will hold their own far better than the overall market.
And so that’s precisely how we’re trading it.
Have a look at the following paste-up of defense leader Northrop Grumman (NYSE:NOC) charted against the SPDR S&P 500 ETF (NYSE:SPY) –
While the S&P turned lower in late January, that point marked but a breather for NOC shares, which continued to climb thereafter ten percent to new highs.
And so we trade it.
Should it occur, look for a downturn in the S&P 500 to far outdistance any decline in Northrop Grumman.- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
And let the drums a’wail!
Many happy returns,