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Russian Ukraine War…  Risks and Impacts to Investing

Russian Ukraine War… Risks and Impacts to Investing

March 03, 2022

The topic of conversation everywhere these days is Russia and the Ukraine.  Today we will discuss the impact to investing and the resulting market risks.

Every day we wake up, the hostilities seem to be worse than the day before. In the big picture, the biggest risk right now is if the war extends beyond the borders of Ukraine, drawing other countries into direct military conflict with Russia. The flip side to this is if China becomes emboldened enough to take steps towards Taiwan. Either of those would be a game changer and suggest increasing cash positions rather significantly. Absent that, the most immediate impact on the US, the economy and the stock market is the price of oil going up. No one has been immune to the pain at the pump.  Add to that the increased energy costs for industry and you are effectively looking at an additional tax on the economy.  This represents significant headwinds for the economy and investing right now.  The longer the war continues, the more detrimental the impact.  

So, what steps do you take in response?  Most of you probably follow the indexes, the Dow, the S&P500  and the Nasdaq. They are rather inefficient measures, however, of what's actually happening in the broader market. That’s because the Dow only represents 30 stocks, and almost half the movement of the S&P 500 is driven by the 20 or 30 largest stocks.  It’s a similar situation for the Nasdaq.  You need to add in some technical indicators that can provide a much broader picture of the market, helping you to see what's happening underneath the hood, providing greater clarity for needed changes.

For example, here's 20 or so indicators of the many that we follow. Two of the more important ones are the High Low index and the Bullish percent.  The first measures the percentage of stocks in the market that are trading on 52 week highs versus 52 week lows. The second gives an indication of the percentage of stocks that are trading on buy signals vs sell signals.  These provide a clearer picture of the broader market.  Oftentimes you might see the indexes going down and yet the indicators move up, because the broader market is actually doing better, and vice versa.  Using these can help confirm or challenge changes you are considering.  In many cases, technical indicators can also help to get a jump on trend changes.  Early entry's can make the difference between making or losing a lot, or a little. 

In addition to those indicators, consider tracking charts of the indexes and your investments.  In particular, look at current pricing relative to the 21 day, 50 day and 200 day moving averages to identify the level of strength or weakness .  Look carefully at the volume of shares being traded to know if the big institutional traders are behind the moves.  If so, those moves are much more important to pay attention to.

Now it’s time to put it all together and prepare your playbook.  To use a football analogy, you clearly know if you're on offense or defense, but the plays that you need to execute really depend upon where you are on the field . The process we use factors in many indicators to tell us precisely where we are on the field at any given time. In this case, in late February, before the Russian invasion, the indicators moved us into the center of the field on the defensive side. And as you might see there, that calls for raising cash positions, selling off pieces that aren't doing well, and refocusing attention on sectors with strong relative strength, such as oil and commodities.  It should surprise no one, that if you increase your cash positions and increase your bonds, you're able to weather the storm better, with less volatility. But the added benefit is that when coming out of any crisis, you have some dry powder, some extra cash there to take advantage of opportunities that come along.  Having such a plan takes the emotion out of it, making your decisions more objective.  To that end, the more data-based and rules-driven your plan is, the better.  


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