“Buy when the cannons are firing, and sell when the trumpets are blowing” — Nathan Meyer Rothschild

There has been much media attention, rightly so, of what appears to be an impending Russian incursion into Ukraine. The threat should be taken with due consideration.

There is an old investment saw on Wall Street about selling the rumor and buying the fact when it comes to trading in a war scenario. Recalling the United States’ first involvement in the Middle East on a grand scale in the early 1990’s, operation Desert Shield and Desert Storm, we had such a trading scenario. The S&P 500 had hit a July 16 1990 high of 369.17 and had drifted lower going into the end of the month. On August 2nd of 1990, Iraq invaded Kuwait and continued to occupy the country over the next several months. As time progressed international tensions increased as Iraq refused to withdraw. Stock markets moved lower and oil prices climbed in response to the perception of the risk associated with a much larger conflict in the oil rich region.

The United States and a coalition of 34 other nations proceeded to build up forces into January of 1991 hoping that the threat of more conflict would incentivize Iraq’s Saddam Hussein to withdraw, but ultimately it took military action to dislodge his forces.

Markets were as tight as a rubber band stretched to its capacity into the start of Desert Storm on January 17, 1991. The S&P 500 hit a low of 309.35 on January 14, 1991 (a 16% decline from the prior July high) and by the end of the combat phase of operations on February 28th, the index had risen to 369.91 a gain of 19.58%. So selling the rumor of war (the preparation), buying the first bullet, and then selling the trumpets of victory as a trading scenario worked out handily for equities.

But for oil it was the opposite reaction. As reported in the Los Angeles Times “One day after the United States and its allies launched a massive attack on Iraq, oil prices in New York plunged an unprecedented $10.56 a barrel to $21.44--a dime below its price on Aug. 1, the day before Iraq invaded Kuwait. The free fall confounded predictions that a war would cause oil prices to soar as high as $60 a barrel.”

So both markets round tripped essentially.

The United States and the coalition partners withdrew shortly after the end of conflict and the S&P 500 closed out the year at 417.09 for a 13% gain for the calendar year and a gain of close to 35% from the initiation of Desert Storm.

As to our master cycle and the turning points we spoke to in the last few blogs, our assumption was for a high on the 16th of February, yesterday, +/1 trading day for the S&P 500 and a subsequent low at the end of the month. Sometimes cycles invert and anticipated highs turn out as lows and vice versa. We shall see if this is the case. The drums of war appear to have thrown a wrench into our analysis, but for now we are sticking to our roadmap. Trade well and stay safe.

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