Some fear returned to the stock market on Thursday and the S&P 500 dipped back below 2000 on growing evidence that Russian forces have moved into Ukraine with significant military assets. NATO released satellite images of what it identified as Russian artillery battalions cross the border and setting up offensive positions against Ukrainian forces.
And after the close, President Barack Obama said Russia’s “ongoing incursion” into Ukraine was responsible for the violence there and that the latest events would bring “more costs and consequences for Russia.”
Click to Enlarge This comes as the summertime lull looks set to end (traditionally, after the Labor Day holiday) with stocks looking vulnerable perched at new highs (barely) amid collapsing volume and fresh signs of concern.
Investors need to take notice.
The CBOE Volatility Index, or the VIX — Wall Street’s “fear gauge” — is testing back over its 50-day moving average as it looks ready for its first significant uptrend since July. And high-yield junk corporate bonds, the hinge on which the market turned lower back in July, is stalling at its June highs and looks set for a reversal lower.
Investors have enjoyed calm in the market over the last few weeks as the economic data, especially on inflation, diminished what had been a big bugaboo in late July and early August: the specter of sooner-than-expected interest rate hikes from the Federal Reserve.
And while this issue has been moved to the backburner for now, fresh concerns are boiling up.
The situation in Ukraine looks ready to escalate has Moscow has little option but to more forcefully intervene in Ukraine now that pro-Russian separatists in the east have suffered a series of military defeats and have been knocked back on their heels.
But there’s more.
Political risks are on the rise heading into the November midterm elections, setting the stage for another round of contentious budget battles between the White House and Congress of a type we haven’t seen since 2012. The Fed’s QE3 bond purchase stimulus is set to end in October, leaving the market without a steady flow of cheap money for the first time since 2012. Prior periods of no Fed purchases in 2010 and 2011 were accompanied by periods of market weakness.
And finally, the last few days has seen expectations rise for next week’s upcoming European Central Bank policy meeting. The risk of disappointment is high as the ECB legally isn’t able to launch the type of Fed-style QE bond buying program, despite growing expectations that such a program is imminent as Europe struggles with deflation and unemployment.
Click to Enlarge Fresh opportunities are appearing in defensive assets, with precious metals in particularly looking ready to benefit from the fresh wave of fear. The iShares Silver Trust (SLV) is cutting up and out of its tight two-month downtrend channel.
In response, I’ve recommended the VelocityShares 3x Long Silver ETN (USLV) to clients. If you’re less aggressive, the unleveraged SLV would be a good choice.
With trading volumes set to rise to more normal levels after the long holiday weekend, Thursday’s pullback could be a preview of a bumpy September for a comfortable and complacent stock market.