Terrorism, Oil & the Markets

Last week, we stated that “being short at this juncture is especially dangerous . . . While there may be opportunities in the future to trade from that side, we expect them to come from significantly higher levels.”

That comment obviously failed to contemplate the most recent horror show out of Iraq. Not to be flippant in light of these murders, but I’d like to add a few additional thoughts regarding the markets:

1) Stop losses are not an intra-day phenomena, but should be based upon closing prices; Any action today before the close will not violate your discipline; Use the recent reversal day lows as your stops base upon closing prices;

2) Watch the intraday up/down volume for a climax. For example, at one point earlier this morning, the up/down volume was 15 to 1 on the Nasdaq, and 12 to 1 on the NYSE. In our view, that is simply a extreme level of selling associated with reversals;

3) In light of the recent attacks in Iraq, I considered moving my “line in the sand,” to the March lows in the QQQs, at $34, and the May lows for the SMHs. Most investors are better off sticking with their original stops. I do not like to violate my own discipline – when an externality impacts the markets, I am willing to consider being a little flexible. That said, discipline trumps flexibility in the long run.

Lastly, I have long wondered about whether terrorists plan attacks around market pivot points for maximum economic damage; Today’s assault raises that issue again. (Hear me out on this one).

Consider the coordinated assault on various oil installations as an attack on the lifeblood of global capitalism. With oil over $41 a barrel, there is a huge vulnerability in the global economy to a major oil disruption. That explains why there hass been attacks on pipelines, on foreign oil engineers living in Saudi Arabia, and on shipping lanes. I would not be surprised to see attempts made on big tankers or on oil installations in a less guarded part of the world, such as South America.

It is not unthinkable that terrorists are targeting perceived vulnerabilities in the global economic infrastructure: 9/11 happened just as the market was about to reverse – indeed, the futures were up huge that fateful morning. Today’s attack happened coincidentally at another market pivot point. That suggests global stock markets are targets for these sick bastards.

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