Equity Risk: Why We're Taking The U.S.-North Korea Threat Seriously
Investing.com | Apr 19, 2017 00:34
by Chaim Siegel of Elazar Advisors, LLC
h3 Stocks At Critical Juncture With US - North Korea Risk/h3In a matter of weeks US President Donald Trump directed military strikes in Syria (April 6th), Afghanistan (April 13th) and has suggested that it moved a strike force toward North Korea (April 8th). North Korea conducted missile tests as recently as this past Sunday and April 5th.
Vice-President Mike Pence just announced that the recent US strikes should be considered by North Korea as a direct statement and threat. While military forces position, the stock market is at a critical juncture.
Any further buildup of tension could break the market lower. And that would create a buying opportunity.
h3 /h3 h3 US Military Considerations/h3President Trump has shown throughout his presidency so far that the military is a key US asset that needs investment. His recent actions show why he has such beliefs. He’s repeatedly criticized the previous, Obama-led administration for its lack of military action, leaving an open window for foreign enemies to build up forces. It's no surprise, therefore, that early in his tenure President Trump is taking action to reverse that leeway given to US enemies.
North Korea is reported to have nuclear capability but may not have the ability to reach mainland-USA yet. As North Korea tests their own capabilities the US is forced to consider their strategy to preempt North Korea’s ability to reach the US mainland with nuclear warheads.
That’s why investors have to take the recent war moves seriously when managing their portfolios. While nations don’t want conflict, President Trump has proven that he will act quickly and unilaterally. That means investors need to be on guard.
While many may not believe that President Trump will follow through on some of his campaign promises, he does appear to be following through on his military efforts.
We’d expect that after two missile tests in two weeks from North Korea, the US is ready to act. This is something that can escalate—which means market participants should be on guard.
h3 /h3 h3 Market Location/h3The stock market, via S&P 500 ETF proxy SPDR S&P 500 (NYSE:SPY), has been in an uptrend for the last year and change. We drew an uptrend channel in the chart above.
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In the middle of that uptrend channel we found a path that has decisively helped to define direction. We circled areas where the market moved up parallel with the slope of the channel. The market typically hugged that line and moved higher, but there were a couple of spills below.
We are now exactly at that critical point today with the US - North Korean conflict looming. We would guess that while stock market fundamentals are supportive, the conflict could build to break the market below that line.
The downside would potentially be the lower end of the uptrend, or about 225 SPY. That looks to be an area of support.
h3 /h3 h3 Stock Market Fundamentals/h3Counter to the geo-political risk however are improving stock market fundamentals. Earnings are about to have their best quarter since 2011 according to Factset .
Interest rates are still low and CPI slowed meaningfully last week to a negative number. Low inflation, low rates and accelerating earnings are a bullish story for equity markets.
If there were any US military strikes in North Korea, we would use that market dip as a buying opportunity. We would guess that any action would be swift and shorter term in nature. The buildup to such a risk-event could weigh on markets until then.
If the US were to ultimately reduce the North Korean threat, that would be an incredibly bullish outcome and investors would probably be able to buy the market at the low-end of that uptrend channel.
Conclusion
We’re taking seriously the rhetoric and moves from the US administration. Military action could be swift and at any time. Investors need to prepare by not being fully exposed to such risk. Keep your powder dry in order to buy a dip.
Disclaimer: ETFs reported by Elazar Advisors, LLC are guided by our daily, weekly and monthly methodologies. We have a daily overlay which changes more frequently which is reported to our premium members and could differ from the above report.
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