Trading Ukraine Uncertainty

Removing the politics of the Russia-Ukraine issue and focusing on the economic implications of Russia’s bloodless annexation of the Crimean peninsula puts some trading opportunities on the table as global risk premiums jump. In order to do this, a couple of suppositions must be declared. First and most importantly, the United States will not actively engage Russian troops. In many ways, this is a replay of the Georgian conflict in 2008. Georgia was in revolt against Russia and wanted closer ties to the European Union and the US. Their cause was quickly championed by Western leaders until it became obvious that neither the European Union, The United States nor, NATO would take any military action to defend Georgia against Russia. This episode set the precedent for the current situation.

The current situation in the Crimean peninsula is far more important to Russia economically, militarily and humanitarianly. Therefore, the knee jerk reaction by our government to defend Ukraine’s sovereignty against the oppressive forces of communism is simply hyperbole. In poker terms, Vladimir Putin couldn’t call the Secretary of State, John Kerry’s “All in,” fast enough. Putin knew it was a bluff and now sits as the chip leader in the biggest game of Texas hold ’em since the Cold War. Putin is betting that the European Union, NATO and the US will acquiesce to an unstated and unwritten reclamation of the Crimean Peninsula.

The anticipated inaction should resolve to a business as usual approach going forward. This will allow the Ukraine to continue its exportation of corn and wheat, where globally it ranks second and sixth, respectively to the rest of Europe. Therefore, the recent run-up in prices should be viewed as a selling opportunity because both the fundamentals and the commercial trader position strongly suggested that prices in these two markets were already too high. Here are the corn and wheat commercial trader setups. This situation is very similar to spikes in crude oil during Middle East times of crisis.

Every market has a built in fear based reaction. In the case of crude oil and agriculture, the built in reaction to fear is higher prices. Conversely, the built in fear in the stock and currency markets is downward. The Russian stock market has sold off nearly 10% as a result of Putin’s actions. The decline is based on two primary factors. First of all, the largest companies in the MICEX (Russia’s equivalent of the S&P500) are energy companies who would be hurt tremendously by global sanctions and limiting natural gas shipments through Ukrainian pipelines. Secondly, Russia’s economy has slowed considerably over the last two years with GDP falling from more than 7% to less than 2%, currently. Finally, the Russian Ruble has fallen by more than 10% in the last two months as their escalating costs and declining productivity hamper future growth prospects, anyways.

The media makes money by selling advertising. Hype generates attention. Attention generates advertising dollars. Thus, we are inundated by over hyped speculation of what COULD happen with little regard to what is MOST LIKELY to happen. The most likely thing to happen isn’t dramatic at all, which makes for poor headlines. The most likely thing to happen is that business will continue to operate roughly as usual which is most likely to cause the markets to revert to their means as longer term fundamentals that were already in play continue to work through the system.

How to Use Volume Oscillators and Trend Indicators to Make You Money

You should never make a trade based only on a trend indicator. The Volume Oscillator (VO) is another indicator that will help you determine whether a trend is breaking support or resistance. In essence, the old saying is true: without volume there is no price movement and without price movement there is no volume. Use that old saying to your advantage.

Several oscillators like the Percentage Volume Oscillator (PVO) and the Market Volume Oscillator (MVO) and are based on the VO.

The VO calculation is based on two Volume Moving Averages (VMAs). The base of calculation is simple:

VO = [Fast VMA] / [Slow VMA]

The Fast VMA is short term moving average, and the Slow VMA is a long term moving average.

If we use set a VO (5, 20) as an example, the setting would be the Fast VMA to 5 bars and the Slow VMA ito 20 bars. At 5 bars, the Fast VMA is the shorter period and, at 20 bars, the Slow VMA is the longer period.

In essence, the VO calculates the difference between 2 VMAs. This calculation reveals surges in volume and possible abnormal volume activity. The VO tell us where the current volume is in relationship to the average volume over a longer period of time.

If we take a look at the VO setting above, that means that when the VO is over 1 then the Fast VMA is over the Slow MVA and we can conclude that the volume activity in the market is higher than usual. In other words, we can conclude that there is an unusual volume surge based on the parameters we set (5,20).

By knowing how the basis of calculation works in the VO, the indicator becomes a very effective tool in your trading. You should never solely rely on trend based technical indicators. By doing so, you will only see one half of the total picture and it will lead to more losses than wins. When you combine your trend indicators with an oscillator like the VO, you will be able to distinguish whether the changes in the trend are based on abnormal volume activity and make a better decision as to whether to enter a trade.

A final thought is that you should consider a break in support combined with unusual volume activity as panic selling and the opposite is true with a break of resistance with an unusual volume surge which should be considered as greedy buying.

Here’s What Happened the Last Time the US Applied Steel Tariffs

While Donal Trump says “Trade wars are good, and easy to win,” history suggests otherwise. In March 2002, George Bush gave into lobbyists and slapped on steel tariffs of between 8% and 30% on imported steel. At that time, Bush exempted Canada, and Mexico because of NAFTA, plus a few developing countries.

Immediately after those tariffs were applied, the S&P 500 dropped over 33% over the next seven months.

Trump is demonstrating that he is no more astute than Bush was, assuming that a trade war is a ‘good thing’. Every time a country applies protectionist policies, other countries do the same, and the losers are the consumers who end up paying more for the finished products.

Governments always react, never fully understanding the end result. Trying to protect an inefficient industry in your country by applying tariffs against a more productive country does not make the domestic industry more efficient, it just makes the finished products more expensive for your consumers. Tariffs are designed to raise the cost of imported goods. They are nothing more than a tax, and in this case, a tax to be paid by US consumers.

So sure, Trump may succumb to steel lobbyist in the US and apply these tariffs to save 143,000 jobs in the steel industry, but these tariffs will hurt over 6 million other workers in industries like the auto industry that use steel to manufacture their products. The end result is the finished products that use steel or aluminum are going to cost more for consumers. So how is this a ‘good thing?’

For US companies that use steel and aluminum, not only will their costs go up, they will be less competitive, and their exports will suffer. And then of course we will have the problem of reciprocal tariffs that have already been threatened by countries being hit by Trump’s steel and aluminum tariffs. The European Union and Canada have already stated that they will retaliate.

Currencies play a huge role in the cost of imported products. Canada is the biggest exporter of steel to the US. The $CAN is currently trading at 77.50 against the $US, meaning all other things being equal, steel priced in $CAN will be 22.5% cheaper than steel priced in the $US.

While these tariffs may help the bottom line for American steel companies, the real losers will be the US consumers. If this turns into a full- on trade war, there will be many more casualties globally, including investors.