War is Hell… But Good for the Market?

DJIA: 43,387

War is Hell… but good for the market? It depends on the market. So far so good for this market, and it was good for the market when Ukraine was invaded back in 2022.   After an initial downdraft, the market ended much higher the very day of the invasion. The two experiences, however, could not be more different, technically speaking. Back then the S&P already had dropped some 8% in anticipation of the well-advertised event. The weakness seemed to discount the invasion, and that proved so.   This time, the market was only a couple of percent below its all-time high. While markets were hardly unaware, markets were not weak in anticipation. Though not a complete surprise, the news was not discounted in terms of price. So, how is it that the two events so far have produced the same outcome? Could be it’s the market that makes the news.

When we said it depends on the market, this is what we meant. Technically good markets simply have good outcomes. We wouldn’t say there’s no bad news in even good markets, but much of the bad news gets ignored. Similarly, in bad or declining markets, have you ever noticed the news seems to follow price? There’s plenty of bad news, and often news that might have been otherwise ignored. In the scheme of things, the problem that remains is not one of war and peace, rather the problem that has plagued the market all along – uncertainty. An Iran – Israel peace almost seems an oxymoron. Hope springs eternal, but you know what they say about hope as an investment tactic. The far better guide is the technical backdrop, particularly those Advance/Decline numbers. When most days, most stocks go up, good things usually happen.

While the winners in all this are many and the losers few, there are some losers.  Most obvious, the good news has been bad news for Oil.  While we have no idea where Oil itself may go, oil stocks seem attractive on this weakness. To some extent the stocks were used as a hedge, take it from us, hence the reason for weakness. But with a market cap of only some 3% of the S&P there can’t be many real sellers left.  More importantly, the stocks have made lows. Components of the Energy sector ETF (XLE – 86) have cycled from 5% below their 50-day to more than 90% above. This kind of momentum shift typically proves important. Gold also could be in for a little hedge-end selling. Here the trend is simply so strong it should be temporary. Less clear are Aerospace/Defense stocks which also could see a temporary stall.  That said, an outbreak of peace won’t stop defense spending. The recent focus on European Defense shares misses the point that 70-80% of the spend there goes to US companies.

When it comes to Aerospace/Defense stocks, less familiar names like KTOS (41), AVAV (272) and HWM (177) have better charts than the more familiar Lockheed Martin’s (458). Yet the relevant ETFs, XAR (207) and ITA (184), are indistinguishable. Also interesting here, and perhaps even more timely, are the Cyber Security stocks. The ETFs here, CIBR (75) and HACK (86), are similarly indistinguishable, understandable as their top holdings are pretty much the same.  Meanwhile, if you’re looking for the next Microsoft (MSFT – 497), it could well be Microsoft. Other good charts among what we have called retro stocks — Oracle (ORCL – 213), IBM (292) and Dell (126), not to forget GE (251), the Industrial or Defense stock, you get to decide.

The many good charts alluded to above paint an attractive picture for the market as a whole. Still, they’re pretty much visiting in what is Tech’s world.  The S&P Technology sector and the NASDAQ 100 closed at new highs. While the strength has been obvious, this follows significant pullbacks. Specifically, the NASDAQ 100 cycled from a nine-month low to a one-year high, each time the index was then higher a year later, according to SentimenTrader.com.  The obvious cautionary note applies, studies like this, mean up but not straight up. Relevant ETFs are SMH (277) for the Semis, and IGV (109) for Software. You might also consider MTUM (237), Tech heavy but more diversified. It includes JP Morgan (JPM – 289) a Tech chart under the guise of a bank.

Frank D. Gretz

Click to Download