We’re going to travel east and west in today’s letter to get a better feel for market direction in the coming weeks… and we do hope you’ll join us…
Cleared for Take Off!
We start in the thick forests of the western Ukraine, where U.S. paratroopers have openly begun training with Ukrainian forces in their battle with Russian sponsored militias in the east of the country.
It’s a development that has been good for the journalists and analysts, to be sure, but it hasn’t made for good U.S./Russian relations, with the former commie scumbags angrily alleging that America’s preparing for outright combat against them.
America, of course, denies, but there’s little question that a proxy war between the two is fast becoming a reality. And with both countries engaging in grander, more realistic war games, and an increasing number of Russian aircraft and navy ships being intercepted in NATO territory, the situation grows less stable daily.
A look at the following graphic, already outdated by a couple of months, gives a relatively good picture of the regularity of Russia’s program to test NATO’s resolve in the air.
The question for us, of course, is how will it affect markets? And what sort of developments can we expect going forward with respect to this particular theater of conflict.
The answer, as far as we can see, is rather simple: that the aerospace and defense sector will continue to gain altitude.
To that end, we’ve included below charts for two of the world’s premier weapons manufacturers, General Dynamics (NYSE:GD), makers of everything from armored personnel carriers to submarines to drones, and Northrop Grumman (NYSE:NOC), military systems and air warfare specialists.
Here’s the both of them for the last two years –
This kind of sustained earnings momentum is a product, in large part, of the increasing militarism we’re witnessing worldwide. In the Middle East, the South China Sea, Africa – everywhere you turn, there’s a growing market for the types of product these companies sell.
And lately, both companies’ shares took a great leap higher (red circles) after they outright crushed Wall Street earnings estimates. In the case of General Dynamics, the company bettered consensus by $0.21 (10%), NOC by a wild $0.39 (17%). The former logged a 5% gain on earnings day, while the latter flew by closer to 8% – its biggest one day pop in over six years.
Winners and Losers
And that sort of growth will likely continue until all the global showdowns and blow-ups come to an end.
But while the defense industry is producing tremendous winning numbers, the combatants in the above mentioned proxy war are not faring equally well. The U.S. market is sluggish and her economy is looking for signs of renewed growth, but in Russia the outlook is patently grim.
Consider first, the fate of crude oil, a major source of revenue for the Russians and a commodity upon which it’s overly dependent.
Take a look here –
The chart tells no lies. Oil is getting hammered – along with the rest of the commodities – as the dollar remains strong and investment demand for real stuff wanes.
Crude is now down to its lowest level in twelve years (!) putting the Russian economy in genuine peril as its national revenues take a beating. Recent diplomatic moves with the Chinese and Iranians will certainly serve them economically over the long run, but there’s little to be done today, when the country’s revenue base continues to erode on a daily basis.
So, if it’s their goal to prosecute an all out war to recapture their former Soviet glory (as we suspect), then you can be sure they’ll have one terrible time doing so, as under current conditions it’ll cost their entire population a severe measure of deprivation to accomplish that.
War Rations on the Horizon!?
With oil plumbing ever new depths and the stakes (and cost) of the Russian war increasing, how does the market view Russia as an investment?
A look at the chart reveals some basic truths.
This is a chart of the Market Vectors Russia ETF (NYSE:RSX), a good proxy for the Russian market as a whole. And what’s it telling us?
In the first place, you’ll notice a very close relationship between the index in Moscow and the chart of oil, above. As we’ve already stated, Russia’s economy – and stock exchange – are very closely tied to moves in crude.
That said, the chart is showing several demonstrable red flag patterns that should have everyone interested in owning Russian shares in a panic.
First up, the break below the latest descending triangle (in red) is a clear continuation indication. That is, once support below the triangle gave way, the next round of selling was (and remains) assured. The fact that so little selling actually occurred on the break should provide only faint hope to the bulls. This is, technically speaking, not a market to be toyed with.
Here’s a close-up of the failure at support –
Second, and equally important, is the next level of support at roughly $15.75 (in blue), the point of the last retracement low. Once that level gives away – and it could very easily do so by the end of this week, triggered by continuing weakness in oil – the next target lower is the existing bear market bottom of $12.50 (not seen on chart), set last December.
On other words we could be on our way toward a further 25% decline in the Russian market unless oil prices firm up.
Will it happen?
What’s clear, however, is that the risks remain on the downside – along with the momentum. RSI and MACD are sub-waterline, and three of four moving averages are descending with price below them all. This is a market to short.
And that’s what we’re doing.
Wall Street Elite recommends you consider the sale of the RSX November 18 CALL, now trading for $0.34 and purchase of the RSX November 15 PUT, selling today for $0.74. Total outlay for the trade is $0.40 per pair.
War is money.
With kind regards,
Hugh L. O’Haynew. Senior Analyst