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What North Korea’s Threats Mean for Traders

Be prepared for negative news and a drop in the Dow


As you’ve likely heard by now, South Korea warned over the weekend that North Korea could deliberately carry out a provocative act (including possibly a missile test) this week in a calculated move designed to extract aid concessions. Tensions are high, and so is the chance that a war may be started on accident — an event that could spook investors into a bout of panic selling.

Foreshadowing in the Kospi?

China has shown an unusual degree of displeasure with Pyongyang’s recent bellicose actions. However, China’s ability to influence decision making in Pyongyang is believed to be somewhat limited.

South Korea also continues to face trouble from the Bank of Japan’s recent actions to crush the value of the yen. The devaluation of the yen makes the price of Japanese experts cheaper than South Korean exports, and could potentially lead to a new phase of the global currency wars. The Korean stock market index, known as the Kospi, was down for the sixth day in a row — and that tends to have a depressing effect on U.S. tech stocks as well. The Tokyo stock market, called the Nikkei, was up again, by a big 2.5%.

Except for the Kospi, most Asian markets have taken the Pyongyang declaration of nuclear war in stride. But there could be a time in coming days when the war of words escalates. In these conditions, one side could make a mistake — a colonel could hit the wrong button, or misunderstand an order — and you could easily have a round of shooting that no one really wants.

Headlines Could Rattle Currency Complacency

I mean, the North Korean government has reportedly put a three-day war plan on the Internet, informed the U.S. and South Korean governments that they intended to attack, announced that a final attack plan had been approved, and given foreign embassies a warning that they could not be protected if war broke out, giving them five days to clear out. In these circumstances, as you can see, any mistakes or misinterpretations might be magnified.

The reason I am telling you this is that we may well see a bad headline out of the Korean peninsula in coming days that shakes the currency complacency. Investors might finally come to the snap conclusion that a hot war has begun in an era with tremendous value to the global economy, including all the important South Korean shipbuilding and electronics businesses.

Prep for a Down Day

If such a headline were to appear, knocking down stocks, my instinct is that a conflict (or threat of conflict) would transpire very quickly and then evaporate. So we need to be on alert ourselves, ready to buy a session in which the Dow Jones Industrials might be down 200 to 300 points on a Korean headline.

Another piece of the puzzle to keep in mind is that a truly provocative, nuclear-armed Korea would lead to a new push for Japan to be re-armed. Remember that it has fallen under the strategic umbrella of the United States since the end of World War II.

A re-armament effort might be just the thing to pull Japan out of its prolonged recession — and would be a boost for a lot of U.S. companies that would sell machinery and arms to Tokyo. This may be part of the reason that Boeing (NYSE:BA), a major Pentagon contractor that was our Trade of the Day yesterday, has been trending up. Others would include Northrop Grumman (NYSE:NOC), Lockheed Martin (NYSE:LMT), Alliant Techsystems (NYSE:ATK), L-3 Communications (NYSE:LLL) and General Dynamics (NYSE:GD). Stay tuned.

InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days. 

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