A long time ago, in a not so far away place... we were walking patrol. I think I was a corporal at the time. Maybe I was a lance corporal. Regardless, I was the squad leader. Training mission, we had been detached. Walking patrol. Loosely following a dirt road with my three teams staggered on either side of the road, making sure not to be seen actually on the road itself, but keeping eye contact with the road and with each other. Supposed to link up with our lieutenant, who was leading the rest of the platoon, supposedly toward our position from the north.
They were late. The lieutenant was a notoriously poor navigator, so I was mildly concerned. This is before GPS, and we were radio silent, so there would be no reaching out and touching someone. I'd stay close to the road. There was no veering off anyway. The map said to our east was an impact area for a mortar range, and to the west was a civilian neighborhood. I wasn't about to traipse my people in either direction. (The lieutenant eventually came out of the woods with almost 40 troops from the east. The veterans reading this, can imagine my disgust.)
Well before our lieutenant showed up, OPFOR (acronym for opposition force in military exercises ) did. At first it was a rumble. Then it got loud. Then the ground began to tremble ever so slightly. Then more than slightly. I signaled my team leaders.... get down, find cover, conceal. The first tank appeared so big, its silhouette so tall as the vehicle crested to top of a small hill immediately to our north. It rumbled. The shoulders and head of a crew member, apparently less concerned than I about radio silence... visible atop the turret. Then another. Then another. In all 10 M-60A1 tanks rumbled past within 20 to 30 feet of our scattered positions. The infrared attachment was on the main gun. The tenth vehicle with the turret was facing the rear, so we had to stay concealed until they were out of sight.
I've been around tanks since. Always impressed with their size and power... and their weight. (Ain't nothing like having two tanks pull up on either side of your foxhole.) I guess I was about 19 at the time. I never ever forgot how awestruck I was, really just a kid from Queens, NY, by these tanks that first time that I had witnessed a column on the move. I thought to myself, a mere sight like this could be used as quite the psychological weapon.
Head Games
I had my hands full with a family situation that arose on Sunday night, and had to travel on short notice. Hence, my failure to communicate with you on Tuesday, or warn you ahead of time that I would be off. I also learned on Sunday night that Soviet, I mean Russian President Vladimir Putin had recognized the independence of the two break-away Ukrainian provinces of Donetsk and Luhansk. These two provinces are heavily populated by ethnic Russians and comprise about one-third of the eastern Ukrainian region known as Donbas and border Russia proper.
Within short order, the upper house of Russia's legislature would unanimously grant President Putin the right to deploy troops outside of Russian borders, and Russia would sign agreements with these two suddenly independent states that would in bizarro fashion legitimize the use of and invite Russian forces across the no longer recognized Ukrainian/Russo border.
The decision to recognize parts of Ukrainian territory as no longer Ukrainian as a means aimed at justifying the fluid movement of "peacekeeping" troops and military hardware across that border has heightened global fears of a more broad based invasion of central to western Ukraine directly from the east, the north via Belarus, or the south by way of amphibious assault. Maybe all three. The Ukrainian capital city of Kyiv lies only a rough 250 miles or so from the Belorussian border.
As readers likely noted, equity index futures traded deep into the hole on Monday ahead of Tuesday's opening of a holiday shortened trading week, as short term capital flows poured out of equities, and into safe haven quality sovereign debt securities, the US dollar, and key precious as well as industrial commodities, especially oil. Nearly all of these late Monday/early Tuesday moves were the result of algorithmic overshoot and reversed to varying degrees early on in the Tuesday regular session and then at least twice more prior to the closing bell.
Response
Germany stepped to the plate first as Chancellor Olaf Scholz put a stop to the Nord Stream 2 certification process, the idea being that Germany (with something significant actually at stake) could purchase energy based commodities elsewhere, depriving the Russian war machine of economic means with troops massed in size well ahead of winter's end.
Within short order, in the UK, Prime Minister Boris Johnson announced sanctions placed upon five Russian banks and three individuals of "high net worth" in what Johnson referred to as the "first tranche" with potentially more to come. The European Union jumped on with a package of sanctions that included targeting 351 members of the Russian legislature and another 27 individuals being blamed for undermining the government in Kyiv. The idea there is to deprive Russian leadership of the benefits of western financing.
President Biden was the last of the western leaders to speak on Tuesday. "To put it simply, Russia just announced that it is carving out a big chunk of Ukraine. He (Putin) is setting up a rationale to take more territory by force in my view... He's setting up a rationale to go much further. This is the beginning of a Russian invasion of Ukraine."
Biden spoke from the White House as Secretary of State Anthony Blinken canceled a meeting with his Russian counterpart scheduled for this Thursday. This round of U.S. sanctions target two of Russia's largest institutions, VEB and Promsvyazbank known to support economic development inside Russia and wealthy Russian families, not to mention... in part, the Russian defense industry. These sanctions are also meant to deprive the Russian government from participating in western markets. No ability to raise new money. No ability for existing debt securities to trade in western markets.
Not So Fast My Friends...
Early Wednesday morning, U.S. equity index futures are trading well off of their overnight and Tuesday lows. U.S. debt securities are again being sold this morning. Gold and oil are both considerably lower this morning than where they had traded on Tuesday.
Tuesday was rather ugly. The S&P 500 gave up 1% for the session, closing down 9.68% year to date, and 10.67% off of the early January highs, placing our broadest measure of equity market performance back in "correction" territory. The Nasdaq Composite surrendered 1.23% on Tuesday, is now -14.47% for 2022, and 17.46% beneath the November highs for that index. This places the Nasdaq Composite back within striking distance of "bear market" territory.
All 11 S&P sector-select SPDR ETFs closed in the red on Tuesday. Four of the top five performing sectors were so called "defensive" type sectors, led by the Utilities (XLU) and Health Care (XLV) , that were down just 0.11% and 0.25%, respectively. Consumer Discretionaries (XLY) , at -2.92%, took the most serious beating for the day by far. The group was led lower by the home improvement retailers that in turn were led lower by Home Depot (HD) . Note that though mired within the Industrials sector, defense contractors in general beat the broader market again on Tuesday.
Speaking to breath, losers beat winners at the NYSE by a rough 7 to 2, and at the Nasdaq by slightly less than 3 to 1. Advancing volume took 19.2% of the NYSE aggregate and 26.8% of the aggregate at the Nasdaq. Now is where it gets more troubling. Aggregate trading volume increased for names listed at both of these primary exchanges on Tuesday from Friday. That's rough enough.
Now the Nasdaq Composite has shaded red for four consecutive trading sessions and for six of the past seven. Aggregate trading volume attributable to Nasdaq Composite subordinate names not only increased on Tuesday from Friday, but also on Friday from Thursday... meaning that professional distribution has accelerated and broadened at lower prices. Kind of the "Giffen good" concept in reverse.
So, are we calling the end of the attempted rally that started with that Monday, January 24th reversal, Sarge? Not so fast my friends.. not so fast. The S&P 500 has "only" closed in the red for three straight session. Aggregate trading volume attributable to S&P 500 subordinate names actually experienced a decline on Tuesday from Monday... meaning that professional distribution actually thinned at lower prices. Really, Sarge? Nobody else anywhere in Fin media is pointing this out? Really my friends. Not that we aren't heading lower, we certainly could be, but there is certainly no consensus among portfolio managers running large-cap portfolios that we are. I will confirm for you the death of this attempted bull run when the S&P 500 and/or the Nasdaq Composite makes an intraday low that happens to be lower than the ones created on January 24th.
Remember To...
Identify
Avenues of attack as well as targets of opportunity.
Adapt
To conditions around you. You are part of your environment, not the other way around.
Overcome
You know if you are over or under exposed. Your ability to sleep or confront life's realities informs you on these matters. Listen.
Way Back and Gone
Palo Alto Networks (PANW) hit the ball out of the park on Tuesday night. The cybersecurity giant posted fiscal second quarter EPS of $1.74 on revenue of $1.32B. Both lines beat Wall Street, and the revs were good for year over year growth of 29.4%. The firm projected billings growth of 25% to 26% for the full fiscal year as well as revenue growth of 27% to 29%, well above Wall Street's view. The stock is up 7.5% overnight. Just an FYI, Zscaler (ZS) reports tomorrow (Thursday) night. Your pal likes, trades, and is long both of these names.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 15.4% y/y.
16:30 - API Oil Inventories (Weekly): Last -1.076M.
The Fed (All Times Eastern)
09:00 - Speaker: San Francisco Fed Pres. Mary Daly.
