Multiple respected & important sources indicate and warn of a fresh and significant military buildup along Russia's border with Ukraine.
Equities have held relative strength since the annexation of Crimea, but a flight to quality seems to have begun based on strangely decreased 10-Year Treasury Yields post the FOMC scare.
Investors have opportunity still to reduce SPDR S&P 500 exposure early, and to reduce risk tied to higher beta stocks, and to hedge risk with relative instruments.
According to respected and important sources, Russia has pursued heavy military buildup along the border with Ukraine over recent days. As a result, the stock market could be at cliff's edge approaching the weekend. Stocks had been on the rise since Russia's unopposed annexation of Crimea, but with a force now ominously threatening Eastern Ukraine, equities have since edged lower. It seems even that a sort of stealth flight to quality may already be underway, though it excludes gold to this point. Given that Putin's logic is not consistent with that of traders, stocks appear to have been bid up into danger. Therefore, I recommend investors wake up and sell holdings of the SPDR S&P 500 (NYSEARCA:SPY) and reduce exposure to index components Friday ahead of what could be a sharp drop on any new Russian push into Ukraine, which those close to the situation feel may be imminent.
Reports from respected sources Thursday indicate that a Russian military buildup has occurred along the Russian border with Ukraine. A high ranking Ukrainian defense official claims that a force of 100,000 Russian troops has massed at the border. Based on trading since the start of March, there seems to be a sort of denial of the danger, though those in Ukraine are so concerned about it that they are preparing for a second invasion. If you listen closely to the recent strong statements made by President Obama in Brussels, they are meant to deter Russia from this precise action. However, they also promise only more sanctions rather than military confrontation unless a NATO ally is threatened. That seems like the kind of response the West would make if it expected an incursion and wanted to avoid war at all costs. In my view, a stronger defense of Ukraine would likely have been vocalized if the current governments of the West viewed another incursion as off the table.
Congressman Mike Turner, Chair of the U.S. Delegation to the NATO Parliamentary Assembly, on Thursday published this statement. I quote him directly here so that readers fully comprehend the levity of this matter:
"I am deeply concerned with the continued buildup of Russian forces along the Ukrainian border. Over the past week, we've seen the buildup of up to 80,000 additional Russian troops along with large amounts of armored ground vehicles, battle tanks, artillery systems as well as rotary and fixed wing aircraft.
This buildup is significant and clearly indicates that President Putin is creating options to potentially capture much of Eastern Ukraine and move on Kyiv.
While Putin may have indicated to President Obama that he has no intentions of advancing further into Ukraine, his actions clearly indicate the opposite.
I call upon the Obama Administration to immediately provide the Ukrainian government a detailed military assessment of Russian action and strategic military advice. "
I doubt this message could be any clearer, and yet the market is unaware of it or is in denial. The comment thread to my most recent bullish article about gold and the SPDR Gold Trust (NYSEARCA:GLD), made on this same premise, illustrates that denial. It is human nature to deny danger until it is acutely present; it is a state of being that preserves sanity and protects people against anxiety. However, if the threat of danger becomes real danger, the human state will shift and adopt fear and panic for self preservation. At that point, investments in stocks are likely to see the impact of these geopolitical drivers and the SPDR S&P 500 should reflect that.
So, I highly recommend investors sell stocks and the SPDR S&P 500, along with other market ETFs including the SPDR Dow Jones (NYSEARCA:DIA) and PowerShares QQQ (NASDAQ:QQQ). Investors should also consider reducing near-term exposure especially to high-beta shares with extended valuations, as those are most sensitive to risk. This would include stocks already impacted by such sensitivity like Tesla (NASDAQ:TSLA), Facebook (NASDAQ:FB), Plug Power (NASDAQ:PLUG) etc.
Those seeking hedges against risk here might consider adding gold and relative ETFs like the SPDR Gold Trust , and over the shorter term, use the iPath S&P 500 ST Futures ETN (NYSEARCA:VXX), ProShares Ultra VIX (NYSEARCA:UVXY) and the VelocityShares 2X VIX ST ETN (NASDAQ:TVIX). I'll discuss these instruments in more detail in another article, but I want to note that these are short-term protection vehicles to be held overnight or over the weekend mainly, or added at first sign of imminent need, and not to be held long-term. Though regarding when to hold them, remember that Putin, unlike an American President, will not consider the best interests of the U.S. market around military actions, and may in fact act while markets are open in order to affect them.
This second article references Obama Administration's concern about the same issue, and indicates that Russia is prepared to invade Ukraine at a moment's notice. Please note that we are not talking about Crimea any longer, but Ukraine proper, which will likely draw a magnitude of greater response from the West, or should anyway. President Obama's statements seem to reflect further passivity and denial that remind me of the response of Europe to Hitler's first advances. The President's position drew this critical response from former Secretary of State Condoleezza Rice, who warns that U.S. passivity opens a vacuum. She says, "When America steps back and there is a vacuum, trouble will fill that vacuum." This is from the former Secretary of State of the United States of America.
A stealth flight to quality may already be underway led by smart money and early adopters of concepts. 10-Year Treasury Yields have declined 6 basis points over the past week, and just after the FOMC published expectations for higher interest rates in its Economic Projections, including for the Fed Funds Rate. In other words, it does not make much sense. Gold should have been moving higher as well, but downward momentum in the safe haven security off the Crimean issue settling was propelled further by Goldman Sachs' restatement of its bearish forecast for gold this year. I attempted to guide investors against this momentum yesterday via this article, and I expect gold to sharply change course shortly.
The purpose of this article is to warn investors of clear and present danger, and to suggest the divestiture of SPDR S&P 500 holdings, the reduction of high-beta risky assets and the use of protection over the short-term to hedge against risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.