Let’s admit the obvious, or at least the hopefully obvious, for humanity’s sake. The U.S. and North Korea are not about to engage in nuclear warfare. As scary as Kim Jong Un vs. Donald Trump and his surrounding generals may seem, there is still enough sense in this world even among the political elite to keep the planet from destroying itself.
But that doesn’t mean the market won’t get nervous in the meantime. It already is getting nervous. Gold and the yen, considered safe havens, are both rising, along with bitcoin which is near all-time highs. The dollar remains technically very weak. While the VIX is still historically low, it did spike 15% on Aug. 9 after Trump’s “fire and fury” threat against the communist totalitarian regime.
So if we all believe the North Korean situation will resolve itself sooner or later without any nuclear explosions, what can traders learn from what is, hopefully, the inevitable resolution?
Simply this. Watch the relief rally, if and when it comes. Seasoned traders know that it’s not the news that matters most, but the reaction to it that is the most telling. If there is a major relief rally as tensions with North Korea ease, that means there is plenty of money to support the current capital structure. But if any relief rally is tepid to nonexistent, this will spell major trouble for stocks.
The SPDR S&P 500Ă‚ (SPY, Financial) is at something of an historical crossroads now. For the first time ever, the index has not moved more than 0.3% in either direction on a closing basis for two straight weeks. Aug. 9 marked a new record 14 straight trading days of almost no movement in the broad index. Investors are waiting for something to guide their next moves. What better than the potential resolution of a looming nuclear confrontation?
August to October is typically a very dangerous period for the larger indexes. Crashes obviously do not happen every year, but when they do happen, they typically happen between August and October. The crash of 2015 occurred in late August. The biggest correction of 2014 bottomed in October. The crash of 2008 occurred in late September. The crash of 1987 occurred in October as did the crash of 1929. That is not to say there will be a crash this year by October, but if there is no relief rally, that tepid reaction to good news would greatly increase the chances of a mass selling event by the end of October.
The conclusion? We need not fret over North Korea at this point. Something, somewhere will show up to diffuse the situation. When it does, watch the market reaction.
And if, heaven forbid, the situation is not resolved and somebody drops a bomb on Guam, well, a mass market selloff would be the least of our problems.
