The point of the statement above, "When the missiles fly, it's time to buy" is not necessarily a market endorsement of war, although the military industrial complex companies like BA , Raytheon and others typically stand to gain. The point of the moniker is that the market hates uncertainty and in the lead up to potential war, there's nothing but uncertainty and the market will often discount that in extreme measures. When the missiles actually fly, there's a sense of certainty and the market has a better idea of how to discount these fundamental events we have been talking about this week that can easily run over bounces, divergences , etc. as they are events that the market had not previously or accurately discounted.
As for a short term bounce as was expected earlier in the week, it may still be viable and that's what we are watching for today, but don't forget what the primary underlying trends have been telling us, just this week /I updated the bigger picture in Intermediate Market Update and in last night's Daily Wrap.
Just as a reminder, from the big picture SPY and ES/SPX futures point of view...
We have seen wars, overthrows and the like of major MENA countries in the recent past including ones as big as Egypt, however they didn't have the effect on the market or even oil that this seems to be having early on. I suspect this is because the market structure is so broken (see breadth charts as well as 3C and Leading Indicator charts).
The "Buy the Dip" crowd and the "F_E_D has our back" crowd may be very surprised to find out that what I suggested in this post, The Plunge Protection and Market Correction Team, is the way the market works and this time is no different than any other past bubble over the last 4 centuries of studying bubbles. Remember 1/3rd of professional traders have never seen an interest rate hike that means 1/3rd of Professional traders have never seen a bear market. How much higher is that percentage for the retail "Buy the Dip" crowd?
In any case, we'll look at different market assets that are directly affected by this conflict one by one. The initial outlook for the Shiite Houthi rebels with Iranian backing (and confiscated US weapons) doesn't look good as 10 Gulf/Arab states have formed a coalition that does several things. The countries involved and their commitments thus far include Morocco which is providing 6 fighter jets, Egypt providing Naval Warships and arial support. Sudan has contributed 3 fighter jets, Jordan 6 fighter jets, Kuwait 15 fighter jets, even tiny Bahrain contributed 15 fighter jets. Qatar contributed 10 fighter jets, the UAE 20 fighter jets, Oman is not directly in the conflict but is providing safe harbor for the exiled President of Yemen as the Houthi rebels advanced closer to the southern port of Aden in Yemen, he fled yesterday by boat. Finally the Saudi's who are leading the entire coalition have deployed at least 100 fighter jets, all kinds of heavy artillery , naval warships and 150,000 troops.
In terms of oil, Yemen is almost negligible with several European countries producing more oil, but they do have an 1100 mile border with Saudi Arabia so if the Iranian back Shiites gain a stronghold there, it threatens the middle east both politically and strategically as Yemen is part of the Bab El-Mandeb Strait which is the 4th largest choke point in the world as it connects the Red Sea to the Gulf of Aden and as such, the Suez canal. Thus the shipping blockade set up by the coalition is to protect the choke point in which some 3.8 million barrels of oil a day flow through and is only 18 miles wide at its narrowest point. Should that choke point be endangered, oil would have to go around the tip of Africa.
The obvious danger here is a wider sectarian Sunni/Shiite war erupting as Iran (Shiite) is essentially fighting Saudi Arabia via a proxy war in Yemen much like the West is fighting Russia through a proxy war in Ukraine. Proxy wars like Iraq vs. Iran, Vietnam (Us vs. Soviet Union), Afghanistan (first) US vs. Soviet Union are nothing new, however the religious component and the Shiite/Sunni divide is what makes this a bit more unpredictable especially with elements like ISIS already in the area. The US has also entered in to the coalition, although through logistical and intelligence support
Eventual wild cards may include broader actions taken by Iran as well as Russia and China seeing opportunities.
In any case, we'll be looking at as many of these assets and the broader market as we can.
The idea of a bounce this week was always a minor event, the major theme is market weakness and has been as I expect the October lows to be challenged sooner than later which is why I said I'd never even consider trying to buy a potential bounce here. We are essentially set up for a win / win scenario bounce or not, unless you introduce the risk of trying to go long in an area and for a potential bounce (that may have already been run over) that is really not worth the risk when compared to the potential reward or rather I should say is not worth the reward when compared to the risk.
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