Market behavior according to the plan of the worst-case scenario

What a time! In my dreams, I would not have imagined that the Russian invasion of Ukraine would really be carried out in full. Saber-rattling yes, small attacks with small territorial gains or stabilization yes. But this? A demilitarization and denazification as the official narrative? I am shocked and completely surprised. An incredibly turbulent time lies behind us and also ahead of us, but perhaps not immediately on the stock market.

Nevertheless, regarding the stock market, I sketched out the price trajectory based on this worst-case scenario last Tuesday when the USA closed its embassy in Kyiv. Here is a review of our market commentaries - the magnitudes and reference points always refer to the S&P 500:

The commentary six minutes after CNN published the news that the danger of a Russian invasion is acute, the embassy is being closed, and diplomats are being relocated westward.

14.02.2022, 20:26

++ Relevant News ++

Normally I don't look at news, as it is ultimately known and priced in for a long time in important circles before it reaches the public.

However, there are exceptions where decisions and consequences do not leak out beforehand. We are currently in such a situation and this news essentially explains the market's difficult behavior. The inflation and interest rate issue was actually not sufficient for this.

The Ukraine conflict has just entered the next escalation level. According to CNN, the USA is withdrawing its diplomats from Kyiv due to the danger of a Russian invasion. 

After Russia still made reassuring statements at noon today, troop movements have just intensified. Artillery and missile stations have gone into firing readiness (CBS). There is a rumor going around that CNN reported tomorrow would be the day of attack.

After the market absorbed this news relatively calmly and subsequently fell "only" about one percent, the sketching of possible scenarios followed:

14.02.2022, 20:34

++ Market Reaction ++

All in all, the market is taking the news very calmly. Currently there is already a sharp short-term counter-movement upward, perhaps on news that the attack is not so imminent after all or parts of the news were false reports.

Due to the massive buy signals of recent days and weeks and the mentioned calm reaction, I see two main scenarios: 

1. The attack does not take place now, the escalation recedes and diplomatic steps come to the forefront. Then the uncertainty falls away and the market rises (finally) above the highs of last week.

2. Russia actually launches an attack. Then there will be another panic reaction with a large red candle that takes us to 1-2% below the January lows. There, the market will most likely find a bottom with an "undercut" of the lows and run extremely dynamically upward.

 

At this point, the framework conditions were actually very nicely outlined. As long as the price remained above the lows of February 14, rising prices were to be expected. When they fell below, at the latest in late trading on February 21, it should actually have been clear that the invasion would occur and we would see the undercut that occurred on Thursday. I emphasize actually and should have, because even I did not want to believe in this escalation so much that I simply did not draw the appropriate consequence. Nevertheless, the possibility of this crash was factored in and thus not significant in the portfolio.

Yesterday, the undercut and the expected dynamic counter-movement occurred:

24.02.2022, 21:53

++ Emergency Case and the Expected Consequence ++

On February 14, I outlined the two likely scenarios. Rising prices with de-escalation or a new low about 1-2% lower and from there a dynamic upward movement.

I did not expect this escalation level from Russia and could not imagine it. Nevertheless, the market reacted as described. 

The S&P fell slightly lower and found a bottom 2.2% below the previous low and turned upward from there.

The cards are now on the table and the reactions are clear for now. The market can deal with this and look ahead to the future again. The only concern now could be an expansion of the war to NATO. But that is a question for the future and is not yet acute.

Let us hope that it will not become so.

 

The market delivered extremely strongly, but gold also showed an impressive development. After the price rose 3.5% to over 1970 USD in response to the attack, it reversed course during the day analogous to the stock market. This correction should initially carry into the range of 1830-1860 points. There I locate buying prices for a further rise. However, the sharp counter-reaction has raised slight question marks about the long-term potential. 1790 and 1820 USD are two marks below which I no longer want to see the gold price. If broken, a new setup is necessary.

Another very interesting development shows the ratio of Value vs. Growth, here using the S&P 500 Pure Value and Pure Growth ETFs:

Already in our last article I pointed out that Value had run too far and the time had come to favor Growth. This statement proved to be premature, analogous to market expectations. No wonder given these geopolitical developments. Now, however, parallel to the strong recovery of the stock markets, the Value:Growth ratio has also made an impressive turn and negated the somewhat excessive behavior of recent days in one fell swoop. A very clear signal that the outperformance of Value has come to an end for now in terms of weeks.