Knife catching at a time of war

Mid-week market update: Trying to spot a bottom here is like trying to catch a falling knife – and at a time of war. Here is what I am watching in order to navigate the turmoil.

It’s official. We are entering the Biden administration’s “trade talks are going very well with China” phase of market psychology where asset prices respond to every headline in the Russia-Ukraine conflict. Since it’s virtually impossible to predict what’s ahead on the geopolitical front, traders can only focus on technical internals and how stock prices respond to news.

Virtually every chartist can see the developing head and shoulders pattern in the S&P 500, but that’s not the entire story and investors should look for signs of confirmation from other indicators.




Becoming oversold

I wrote on Sunday that the market was Fearful but not panicked, now the market is showing signs of becoming both oversold and panic is starting to set in.


The Zweig Breadth Thrust Indicator has now reached an oversold condition, which is a constructive sign that the market may be nearing a short-term bottom.



Another constructive sign is the S&P 500 testing a key support level while exhibiting positive RSI divergences.



As well, the term structure of the VIX is inverted, indicating strong fear.



Oversold and panicked markets can become more oversold and panicked. So how can we spot a bottom?



Cross-asset clues

Here is what I am watching in my cross-asset, or inter-market, analysis.


Is the risk-on/risk-off move being confirmed in the safe havens and related plays? As an example, gold, which is a classic safe haven vehicle, is making new highs while exhibiting positive confirmation from RSI indicators. Score one for risk-off.



The USD is another classic safe-haven play during times of stress. By contrast, the euro is especially vulnerable in the current geopolitical environment. Both are trading sideways.



Oil prices have been a beneficiary of the geopolitical turmoil. WTI crude recently violated a rising uptrend, indicating its bull move is becoming exhaustive.



Another sign that the market may be bottoming is the behavior of small-cap stocks. Even as the current Russia-Ukraine episode has clobbered risk assets, small caps are starting to bottom and outperform relative to the S&P 500. Rank that as constructive.



In conclusion, the weight of the evidence is pointing to the stock market undergoing a bottoming process. While it is poised for a relief rally, headlines will undoubtedly contribute to near-term volatility. Traders who choose to take positions in this market will have to monitor how it reacts to news in order to decide whether a bottom is truly in place.


The next test is likely to occur within the next 48-72 hours, when Russian forces cross the line of control into Ukrainian territory. Watch the market reaction.


34 thoughts on “Knife catching at a time of war

  1. We are halfway into a bear market territory for S&P and three quarters of the way in Nasdaq. Is the momentum fading in either index? It seems that market psychology is the ‘ruling reason’. Unless Russia stops at line of control in Donbas, a full scale invasion is in progress.
    Could that be the ‘buy the roar of cannons’ moment?

    1. After the market close, our JPM advisor informed us of his decision to catch the falling knife, albeit a small one.

  2. Here’s my take.

    (a) In the absence of panic, it’s very difficult to spot a bottom.

    (b) Personally, I think we’re close. But what do I know? I’m basing that judgment purely on sentiment.

    (c) I’ve decided that 40% exposure (which is about halfway between bear market and bull market weighting for me) suits my risk tolerance at this juncture – ie, if the market declines another -10% then I’m down another -4%, but if the market rallies +10% I will capture a +4% move.

    (d) It helps that I was well ahead of the SPX ytd before staking my latest positions. If the market crashes from here, I’ll be taking a hit while driving below the speed limit and with safety belt fastened.

    (e) For purely psychological reasons (which is absolutely part of any tactical approach to trading – a form of emotional control if you will), I remind myself that to some extent I’m simply giving back part of many gains earned on earlier pullback plays. For instance, a +10% gain playing the September 2020 pullback and single-digit gains playing pullbacks in 2021.

    Effective trading requires a great deal of introspection and self-understanding. I review my positions, rationale and tactics on a daily basis. As Kass likes to say, I’m always in doubt and often wrong. If I need to make any changes, I will. At this point I’m content with my current positioning and thinking.

  3. Today investors freaked about the potential economic impact of a worsening situation in Ukraine. Not only did wheat and palladium prices surge, Digitimes also posted an article today, saying that Ukraine provides 90% of all Neon gas used in semiconductor manufacturing and that Russia is a critical hexafluorocyclobutene supplier (also used in semiconductor manufacturing)

  4. I’m hoping that it’s not one of Putin’s myriad objectives to prop up inflation and tarnish Biden’s image for the midterm election later this year. If so there’s some incentive to prolong some of the tensions. If let’s say NATO decide to compromise how long would it take them to do so? Hard to see Ukraine going into NATO now so they should just kiss and make up

  5. My friend from Poland (near Ukraine border) just called me that he heard some detonation. HORRIBLE. My parents remembered USSR invasion to Czechoslowakia in 1968 – and now it is basically the same. We stand with Ukraine!

    1. Me too. Russian troops might suffer great casualties in the ensuing asymmetrical guerrilla warfare. Has Russia ever done anything good for the world?

      1. Guerrillas need funding so there’s a big hurdle. Putin can probably setup a puppet regime to manage the guerrillas and also borrow mass surveillance tech of a neighboring country + AI + satellites + drones to reduce effectiveness of guerrillas. After becoming a virologist I now have to get a dual degree in warfare and geopolitics. This is too much.

  6. Hope is not a trading strategy.

    The best hedge is to admit ones incorrect investment decision. Cut your losses, clear your mind and move on. More opportunities are ahead of us.

    1. For every seller there is a buyer. I can’t imagine that selling will turn out to be a smarter decision than buying here. JMO, of course.

  7. Cam,

    I do not remember you taking a position in Nasdaq. It’s mostly SPXL.

    Are your models suggesting Nasdaq over S&P500?

    “I am initiating a long position in the NASDAQ 100 in my account.”

    1. I normally take a position in the S&P 500 but I have been leaning towards the NASDAQ 100 as it is extremely oversold vs. the S&P 500 and other macro tailwinds.

  8. Increasing exposure in the after hours session on Cam’s call – adding to SPY/ QQQ on current pullbacks of about -0.5%.

    1. Sorry, did I miss a trade alert? When and what did it say? SPX above 4269 would look like a failed breakdown and futures closed exactly there. If tomorrow closes green again, I could imagine a bigger move up on Monday/Tuesday. Not really expecting another big up move on Friday before the weekend, but the last 2 days of January plus the first 2 days of February were up big.

      1. Jan, I received it at 11:30 AM eastern time. Buy to the sound of cannons, TQQQ, expect volatility so size positions accordingly.

  9. Was today a relief rally from extremely oversold positions, particularly in NQ? Or, a realization that sanctions are really much milder than expected? The bark was worse than the bite, so to speak.
    Many foreign policy experts think that Europe cannot really afford to put harsh sanctions – roughly 40% of energy comes from Russia and cannot be made up from other sources in any meaningful way.
    This war will be over soon enough.
    I hope Cam writes about investment implications of West’s failure to contain Russia and its hegemonic aspirations, China’s claim on Taiwan, and loss of leadership by US.

    1. Michael Cembalest at JP Morgan Asset Mgmt addressed both energy and the West’s failures in an Eye on the Market piece today.
      On the latter he refers the reader to John Mearsheimer of the University of Chicago’s 2014 paper here:

      Short story, one foreign policy camp felt that bringing Ukraine into Europe would accelerate Putin’s demise, while another felt the Russians would react adversely. Looks like the second group was right, at least in the short run.

      1. WSJ talks about World Disorder. Maps are being redrawn. Spheres of influence are being redefined. Russia in Central and Eastern Europe, China in Asia Pacific, Iran in Middle East.
        What role will US play? Depends on who the leaders are. I shudder when I look at the current leadership on both sides of the political spectrum.
        The Ukrainian invasion is just the beginning of a new world order with serious implications.

        1. Ravindra, I think the timing of this and the extent to which the west will start to fight back will be difficult to predict. Right now there is a lot of worry that Russia is not going to stop at Ukraine and that China will feel encouraged now to start an assault on Taiwan. It is probably going to happen, but when is anybody’s guess. For China it would make sense to wait until Taiwan is less important to US supply chains. The more important implications economically are probably that the western world has to decouple more and sooner from Russia and China, but this will be a notoriously slow process. I do believe it is a longer term headwind for markets, especially for companies that were huge winners during the last decade, like Apple and Tesla for instance or successful export economies like Germany. On the other hand, this will be even more difficult to time.

  10. Reading the posts, there is a lot of fear, understandably.
    Look at the market reaction.
    We have potentially a false break of a H&S which has been really telegraphed well over the last few months. A lot are placed on the wrong foot. Sometimes when there is a false break the market really takes off in the opposite direction. If I remember correctly, Edwards and Mcgee referred to this as a was for triangles. Perhaps we are seeing this now. Will the Fed be less hawkish in this situation?
    My son has a girlfriend who lives in Kiev and word from him is that things are sensationalized…I hope he’s right.
    But there are opportunists who will use any situation to their benefit. That includes the Fed with an excuse to be more dovish.
    We got a nice bar on the SPY yesterday, hammer on the futures ES mini, good volumes.
    Is gold doing a mirror image? Of course they will cry manipulation, but gold is down, TLT is down today while SPY is up….things are not always linear, but it does not add up.
    Are we in a potential ZBT? That will leave some scratching their heads.

    1. Another thing we don’t see in the headlines are the bad demographics in Russia. Never mind that the population of Europe and the US are much larger than Russia’s, the Russian population is shrinking.
      Back in the days of the Soviet Bloc, the population of that union was greater than the US, now Russia does not have even half the population of the US and much worse demographics, they do not have a millennial boom, but a millennial bust.
      I don’t say this to make light of the situation.

  11. Opened trading positions in SPY/ QQQ this morning (on top of existing positions allocated to a longer time frame) and doing well gaming the ups and downs.

    ZBT watch.

    1. I’m generally early trying to game bottoms – but I also tend to make it up when the market reverses. Started trading aggressively long (including TQQQ) right out of the gate. Back in the green ytd.

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