- The market has thus far brushed off the geopolitical risk posed by Russia.
- Recent events portend an escalation and likely troubling consequences near-term.
- Take off long passive market holdings in the SPY, extended valuation ideas and consider hedges.
Judging by the indifference of the stock market to the Russian incursion of Crimea, I'm guessing a good many readers might disagree with my premise. However, I am deeply troubled about the week ahead and basically the rest of March, because of the presence of Russian troops in the Ukraine and the pride of the man who put them there. In a week short of market-moving economic data, save the Retail Sales Report, I expect trading to hinge upon new happenings around the Eastern European issue. So, however unpopular this may be, I would not be invested in the market here, nor would I be long the SPDR S&P 500 (NYSEARCA:SPY) security that tracks it.
The chart above pretty much says nobody cares about what's going on in Crimea. Save for the dip last Monday, stocks have brushed off the fact that a nuclear power has breached international law and is strongly opposed by our Western allies and the U.S. You can see here under that equities across the S&P 500, Dow Jones Industrial Average (NYSEARCA:DIA) and the Nasdaq (NASDAQ:QQQ) all gained last week despite Vladimir Putin's defiance to Western complaints. Take note, though, that gold also increased and led all climbers on the week, with the SPDR Gold Trust (NYSEARCA:GLD) up 1.2% on the week. Oil also edged up and the dollar weakened; these are all bad signs about geopolitical happenings that stand in stark contrast to the gains made in equities.
Trailing 12 Mos.
SPDR S&P 500
SPDR Dow Jones
SPDR Gold Trust
United States Oil (NYSEARCA:USO)
PowerShares DB US $ (NYSEARCA:UUP)
So what is driving stocks then? Greed my friends; it is greed that is driving stocks. Investors bought on weakness, thinking that this event like so many others will simply prove to be a buying opportunity. But, dear reader, Vladimir Putin is not Saddam Hussein and the Ukraine is not the Republic of Georgia. Putin is pushing a referendum for Crimea's secession from the Ukraine sometime between now and March 20th. I expect from now until then we will continue to see what I see as suspect protests against the Ukraine within Crimea. Who knows, we might even see some violence. When that secession vote happens, and now that the Russian legislature has paved the way for Russian troop intervention, I think you can count on a serious Russian troop movement across the border; some 150K troops practiced war games nearby recently and lay waiting today, similar to the calm before the Russian storming of Georgia.
Will the West just sit back and watch? What if the Ukraine fights back and a bloody massacre ensues? What will the West do? I do not think it will matter until after stocks have crashed. This is why, my friends, I see no sound reason to hold the SPDR S&P 500 here. Neither do I see it wise to extend oneself to the momentum names riding far out valuations; yes, I'm talking Plug Power (NASDAQ:PLUG) and the rest.
While we're talking momentum and fuel cell technology, FuelCell Energy (NASDAQ:FCEL) reports results this Monday. FCEL is seen posting another loss, with the street looking for a loss of four cents per share. The stock was up 18% on Friday after a contract award announcement. I would watch out for some give back this week, because I find it suspect that the company had this good news release a day before it reports results. By the way, I once followed both FCEL and PLUG as a senior stock analyst at S&P.
Getting back to the market and the SPY, I find it easy to overlook a light economic schedule set for the week ahead. Other than the Retail Sales Report for February, there's not much of the market-moving sort of economic data scheduled. Economists are looking for retail sales to eke out 0.1% growth when excluding the impact of auto and gasoline sales. That would be an improvement from January's 0.2% decrease. Anyway, if the result comes in short, I think it's safe to say the market will blame it on the weather and move forward. We have at least until April for the economy to fess up as to what is really going on, and whether it's the weather or not slowing down things.
In conclusion, I see little reason to bear risk again this week and would sell the SPDR S&P 500 if long the market and look to shed high momentum extended valuation names especially. It you want to take it a step further, you might add the ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS) and the SPDR Gold Trust to hedge your holdings against the macro risk related to Russia. Failure to do so could very well be at your own peril, in my view.