Yesterday was a tragic day. The downing of a Malaysian Airlines commercial jet with the loss of all therein is, first and foremost, a human tragedy. The Israeli push into Gaza is too, and is also yet another sign how far we are from peace in that region. In the light of what happened it seems trivial to talk about the effects of those events on the stock market, but an awareness of the tragedy doesn’t change the fact that those geopolitical events have an effect, and my role here is to look at markets.
As the news broke, stocks, as you would expect, fell. What strikes me as remarkable, however, is that markets didn’t fall further. We had a day that raised the specter of an escalation in two major conflicts and global destabilization on a massive scale and yet here in the U.S. the Dow Jones fell less than 1 percent on the day. Crude oil continued to push a little higher, but there too, reaction was muted. The price of gold, usually a reliable indicator of fear on a global scale, actually fell quite sharply in yesterday’s trading. Would that have happened if investors were afraid of a meltdown?
This morning it seems that these trends are continuing. U.S. stocks are indicating a higher opening and the weakness in gold continues. This relative lack of reaction is puzzling to many, but it just reaffirms what I have been saying for a while. Those who say we are in a huge bubble and that collapse is imminent are missing the point. As long as there are people ready and willing to buy on every dip we are a long way from collapse.
Of course, the merchants of doom and gloom will say that this is just further evidence that the market is reacting irrationally, and to some extent they may have a point, but any trader will tell you that you can go broke very quickly betting against market irrationality, no matter how right you may believe yourself to be. We can still go a lot higher, and allowing yourself to be talked into selling on bad news just makes it all the more likely that frustration will lead to you compounding an error by buying back in at the top as frustration mounts. This is a time for patience, not precipitous action.
We should keep a wary eye on news over the weekend and beyond, but any new events must be looked at in the context of market reaction to them. Any further news of Russian involvement in the shooting down of the Malaysian jet, even if by proxy, will raise the prospect of even stronger sanctions than were announced yesterday and that would have a direct effect on certain areas of the market, but that may not translate to a general selloff. The fact is that with interest rates low around the world U.S. stocks look like the best bet, even in times of trouble.
Usually conclusions like this would lead me to advise buying on any dip, but does a less that 1 percent drop in the most followed index really constitute a dip? I would say not. In this age where reaction is immediate it is tempting to recommend doing something after a day like yesterday, but I will resist the temptation. If a case can be made for both sides of a trade then no trade is the best trade and that is the situation now.