Romulus Report: Rumors of wars, the market's crystal ball

MARKET Watch

NATO deploys advanced weapons in Eastern Europe. Russia responds with troop movements and threatening military drills. Diplomats are withdrawn and high-level negotiations seemingly break down. Global markets buckle under the growing risk of war.

The above scenario could easily describe the current Vladimir Putin-Ukraine situation, but these events took place 60 years ago during the Cuban missile crisis.

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The World War II Soviet-American cooperative broke down the minute Adolf Hitler’s bunker collapsed, with a relationship that kept slipping until USSR Premier Nikita Khrushchev in 1962 convinced Fidel Castro to allow Soviet nuclear arms onto Cuban soil. When an American spy plane came back with pictures of missile silo construction in the communist country that was a mere 90 miles from Key West, President John F. Kennedy took action. The U.S. military initiated a boycott of Cuba (which was really a blockade without the official act of war connotation) and Kennedy and Khrushchev got back on the phone. An agreement was struck that resulted in America pulling missiles out of Turkey and the Soviets recalling nuclear arms from Cuba. This did not mark the end of the Cold War; it was just the closest the world has ever come to total nuclear Armageddon.

The similarities between then and now are concrete.

It is not so much about Turkey, Cuba and Ukraine as it is a power struggle between two heavily armed and stubborn players. The international investing crowd didn’t like the developments back then and they don’t enjoy seeing Russia and America tangling once again.

In November of 1961, the Dow Jones Industrial Average hit a high of 740, then fell 29% almost a year later. The crisis was resolved by the end of November 1962, and the Dow jumped 40% over the following year.

Currently, global markets have been pulling back since early November and they are still getting hit with each news update that doesn’t talk about a positive resolution. Things could stay like this for a while.

Something else is very similar to what we saw 60 years ago — the stock market’s uncanny ability to see the future.

Stocks peaked in late 1961 as the Soviet missile deployment in Cuba was beginning to take shape (later investigations showed there were already 100 missiles in Cuba by the time the Americans learned about the pending delivery of hundreds more by the end of 1962). The stock market bottomed out in late October, but the situation wasn’t resolved until the end of November. By then, stocks were up more than 10%, on their way to a sustainable rally that lasted for another year.

I know it feels like headlines push the markets around, but most of the time that is just noise.

In this case, just like all others, it pays to scrutinize trading behavior in order to identify the clues left behind by people who know outcomes before the news announces them. It is possible we are seeing a demonstration of that right now (it is only a slight possibility, not a high-edge probability).

Other than a full-scale war, the news on Feb. 11 was as bad as it could be. But after moving only slightly lower on Feb. 14, stocks are holding above their Jan. 24th lows, with a chance of a short-term bounce. During the wee hours of the morning of Feb. 15, starting at 3 a.m., the Futures markets shot up and have held the new price area on news later in the day that Russia is withdrawing some of its forces.

A positive outcome with Russia is not the only event that could spark a solid upside move. COVID is receding and travel and entertainment stocks are responding. Combine this with a de-escalation along the Ukrainian border and stocks could see a nice jump.

For this almost two-year-old bull market to re-invigorate itself though the jump must be broad-based with consistently high volume of shares trading. Since May of 2021, the market has been slowly deteriorating. A lot of damage has already occurred, and it will take significant action to revive this bull.

The reason, paradoxically, is that stocks haven’t experienced enough of a sharp downside move yet, one that demoralizes the bulls and washes out all the selling supply — i.e., "capitulation." Many people believe January was that event, but this belief is based on hope rather than historical market evidence.

Stocks can go higher from here, but in the absence of true capitulation, the odds of an intermediate sustainable rally are not very good.

Wealth, like Rome, cannot be built in a day. But, like Rome, it can be lost in a day. Watch for future announcements from Romulus about profitable market moves, important indicators, and major market swings. For trading education, mentoring, or to beat the markets with Romulus' trading group, contact romulus@groktrade.com or go t0 www.groktrade.com/romulus.