And Here We Go…

And here we go… stocks set NEW highs on the first trading day of the new year and new decade, giving everyone the sense that it was history repeating itself. “the Roaring 20s”

It started with good news out of China, better economic data and an injection of “fresh liquidity” into the banking system, sending those markets up better than 1.2%. Then it moved to Europe, where we got eco data out of the Eurozone and then individual country PMIs. And the good times continued, sending the Eurozone 600 up more than 1.2% while the FTSE, CAC 40 and DAX gained nearly 1% as well. And then the sun rose over the Atlantic and the push higher took hold US futures suggesting a higher opening and then when trading began. The algos pushed even higher. By the end of the day, the Dow added 330 points or 1.1%, S&P surged by 27 points or 0.87%, the Nasdaq gained 119 points or 1.33%.  The Russell was the only one that did not celebrate. That index fell 1.5 points or 0.10%.

It was still the holiday week. Plenty of people still away from their desks, volumes below “normal” as the algos had their way, fighting with each other, tripping over each other as the day wore on. It becomes a bit mindless when you see day after day of action that is difficult to explain when nothing has really changed. Look the Dow had been up 13% as of Oct. 1, 2019. Then it surged another 13% in the last quarter, the S&P, Nasdaq and Russell in tow, in a trend that kept going higher and higher and that continued into the new year. Even news on Jan. 1 that North Korea’s Chubby (Kim Jung Un) was making noise about firing off more missiles and the Iranians had attacked the US embassy in Baghdad did little to stop the surge. Until last night…

And then the first Geo-Political issue of the new decade hits and it is smack in the middle of the Middle-East hotbed…

The evening news reported that the President ordered an airstrike, targeting one of the Middle-East’s “bad guys,” Iranian General Soleimani and his sidekick, military commander Abu Mahdi al-Mohandes as they made their way towards the Baghdad International Airport. Now let’s be clear, these two bandits were making plans to attack (and possibly kill) US diplomats and service members in Iraq and in the region. So this was a pre-emptive strike. And this was after they incited an attack on the US embassy in Iraq on New Year’s day…

To put it in perspective, Soleimani is responsible for helping Syria’s Bashar Assad murder thousands of Syrians. He is also responsible for killing US service members in Iraq along with Iraqis who have been protesting the increasing Iranian influence in Iraq. He was not someone you’re inviting over for dinner.

Global markets reacted quickly. Asian markets fell as the news spread around the world, oil prices surged by nearly 4% (think middle-east tensions, unrest, and disruption to supply), treasuries surged, gold surged and equities (around the world) fell, leaving investors to wonder: What does this mean for the markets and for global political/economic stability? The news wires this morning suggesting that this is a “serious event” the stakes are high and the world expects Iran to do “something.” Just what that is, is unclear. But let’s be clear, an Iranian attempt to disrupt the oil supply through the Strait of Hormuz is not realistic. They would hurt themselves more than disrupt the world oil supply. This oil spike this morning is a “knee jerk” reaction, as is the sell-off we are seeing in global markets. Remember, geo-political events create noise and short-term moves in equity markets. This event, while concerning, will not price stocks in the long term.

Defense stocks will clearly be the play today, as the other sectors come under fire as the nervousness and angst settles in. The XAR – S&P aerospace and defense ETF and other defense sector ETFs will find plenty of buyers. Yesterday, after the news of the first hit the tape. The XAR surged by 2.47% (while the broader market – S&P – rose by 0.87%). So the news overnight about this “hit” should surely send this stock higher, along with so many of the individual defense names: LMT, GD, RTN…

Now expect the media today to dissect and discuss this ad nauseum. What does it mean for US/China relations (if anything)? Does it somehow stall any trade deal? Will it affect coming earnings? What about the improving Chinese PMI. Do we have to worry about that? What about today’s FED statement? Should we be concerned that this event will somehow change the mindset of the FED? Are rates going up as a result of this strike? Hardly… This is a geo-political event that YES, has some broader implications for political stability, etc. But has very little implications for the ongoing story about the global economic environment. Now, is it an “excuse” to take money off the table? For some people yes, you can see that by the action in the global markets so far this morning…

European markets are now halfway through the day and we are seeing those markets come under pressure. But let’s be clear, global markets all surged into year-end. They all felt a bit “fluffy” so this action creates an opportunity for the “Risk Off” trade to begin. Watch as some of the highest flyers get hit the most and that is evident in the US futures. The algos will select names to sell, based on how far they have risen in this last round of gains as they attempt to reduce risk in those momentum names. Right now, this morning, Dow futures are off 300 points or 1.2%, S&Ps down 43 or 1.3%, Nasdaq is off 150 points or 1.5%, and the Russell is off 25 points or 1.5% as well.

So while the whole market will get hit today, pay attention to your names and watch to see if this sell off creates a new opportunity for you to put money to work in names you like. Do not make an emotional decision based on this event. Make that decision based on whether or not you think this events “changes” the story for you.

Today’s economic data includes: Construction Orders – exp of +0.4%, ISM Manufacturing – exp of 49 vs. last month’s 48.1 – so that would be an improvement, and the FOMC (FED) minutes, with plenty of commentary from different FED governors: Lael Brainard and Chicago’s Charlie Evans at 1:15 pm, Dallas’s Bobby Kaplan at 3:30 pm, and Richmond’s Tommy Barkin at 11 am. Do not expect any of these speakers to opine on this latest Middle-East turmoil. It is not in their mandate and we are certainly not making FED policy based on what the Iranian’s do next. Period.

Look for the S&P to back off It should find support somewhere in the 3200/3225 range. But if the rhetoric continues to create angst and the headlines remain concerning, the algos will over-react and that is when the opportunity gets created. There is plenty of support for equities, but remember, the move higher in the past three months, will create an opportunity for a pullback if the tone gets nervous. Just as the sell algos will put pressure on the markets, the BUY algos will not just stand there, they will cancel and move lower creating a void in prices which will only exacerbate and exaggerate the move lower. Stay tuned.

Oil, as discussed, surged higher by 4% on this news, trading as high as $64.09, piercing the April high of $63.90. It has since come back and is trading at $63.39 as the news settles in. Expect oil to remain a bit erratic as this story unfolds and speculation builds over what the next move is for the Iranians. I do not think this spike lasts and I suspect we will see oil come back to the $60/$62 range. But do not be surprised, continued talk of threats and retaliation will keep oil on edge. But not to worry, the world is awash in oil. The Saudis will gladly increase supply if the Iranians try to disrupt it. (Think long simmering feud).

Gold is also moving higher, up $20 or 1.3% at $1,540/oz. On this news, makes sense. It’s the safety trade. In times of stress and angst, people want gold. As long as this continues, we could see gold test the September highs of $1,570/oz.

Take good care

Kp


pasta

Good day for an Arrabiatta recipe… markets are angry

Spaghetti Arrabiata

By now you know that Arrabiata – is the Italian word for angry… And how appropriate for today… this sauce is simple to make and gets it anger from the red chili pepper… You can serve this with any type of pasta you want – but spaghetti or linguine is best.

You will need: olive oil, onion, garlic, red wine, sugar, crushed red pepper (or chili peppers if you want hot, hot, hot), lemon juice, oregano, s&p, crushed tomatoes, tomato paste and chopped parsley…

Bring a pot of salted water to a rolling boil.

In a large pot (or deep sauté pan) on med-hi – heat up olive oil and garlic… sauté a bit – but do not burn – 3 mins or so… now add sliced onion and sauté until soft – like 5 mins more. Next – add 1/2 cup of red wine, 1/2 tbsp. of sugar, fresh squeezed lemon juice (about 1 tbsp.), oregano, bit of tomato paste and a 28 oz can of kitchen ready crushed tomatoes (not in puree – just crushed tomatoes), crushed red pepper (or crushed chili pepper if you prefer) – bring to a boil and then reduce to simmer and cook for 15/20 mins…

Add the spaghetti to the boiling water and cook for 8 mins or until aldente – strain – reserving a mugful of the pasta water. Return pasta to pot and add back about 1/4 cup of the pasta water to re-moisten.  Stir… Now add pasta directly into the sauté pan with the sauce – toss well – add a handful or two of grated parmegiana cheese and serve immediately in warmed bowls. Enjoy with a nice bottle of Brunello di Montalcino. Always have extra cheese on the table for your guests.

Buon Appetito

You May Also Be Interested In:

Kenny Polcari

Kenny is the editor of Morning Thoughts and has been with Seven Figure Publishing since 2019.

Kenny is a CNBC exclusive contributor appearing on shows like The Halftime Report, Power Lunch, and Closing Bell. His market commentary has reached audiences across the nation on media outlets such as Bloomberg, Fox, ABC, and more.

Kenny’s...

View More By Kenny Polcari

LEARN TO TRADE LIKE A PRO WITH THE SEVEN FIGURE PODCAST! [CLICK HERE]