Morning Comment: Iran & North Korea are Connected.

  • Iran is one of the reasons the U.S. does not want North Korea to become a nuclear power.
  • Since N. Korea is connected to the Iran issue, so is China.
  • These new uncertainties should keep oil elevated for longer than it did back in September (after the oil field drone-strikes).
  • That, in turn, should help energy equities.
  • Gold is breaking key resistance, but it is getting very overbought on a short-term basis.

Iran is one of the reasons the U.S. does not want North Korea to become a nuclear power.

As we think about the new developments out of the Middle East and the impact they might have on the markets going forward, we have to remember that this situation also deals with the relationship the U.S. has with North Korea. Secretary of State Pompeo has stated publicly in the past that the real reason why we have to keep N. Korea from obtaining nuclear weapons (and the ability to fire them at targets) is that N. Korea has a history of a strong willingness to sell their military capabilities to the anybody who will pay for them (i.e. Iran). In other words, the situation with North Korea is closely tied to Iran…and always has been…and thus there were two targets when the U.S. killed the Iranian leader in last week’s attack.

Since N. Korea is connected to the Iran issue, so is China.

Therefore, we have to consider whether the situation will escalate with Iran….AND/OR with North Korea. This does not mean that the odds are higher that situation will indeed escalate, but it does tell us that the issue is even more complicated than many people initially realized. Since these new developments include North Korea, it means that they also include China. Thus although some people are saying that China loves these new developments…because it has taken the recent tensions between the U.S. & China off the front pages are a bit misguided. Yes, these new developments have taken the U.S./China relations off the front pages of the newspapers, but they have NOT moved those tensions off the “front pages” of the actual relationship between the two countries. If anything, the developments out of the Middle East complicates the relationship even further.

The response to the Middle East developments has been muted thus far.

Anyway, the futures are trading lower again this morning…due to the increased tensions from over the weekend. Iran’s threat to retaliate…and President Trump’s threat to hit Iran very hard if they retaliate…has the S&P futures trading 15 points lower as we write. That might sound like a lot, but the futures have still not undercut the lows they saw in overnight trading on Thursday night/Friday morning, so its is certainly not a dramatic decline. Let’s face it, we’re looking at a decline of just over 1%...after a 12% rally over the previous three months and a 38% rally over the previous 53 weeks! Therefore, it’s safe to say that this pull-back has been muted…at the very most.

So it certainly looks like most investors are taking the advice of many pundits who are saying that the worst think people can do right now is panic. We agree with this advice, BUT we’d also say although investors should definitely “not panic,” that does NOT mean that investors should “do nothing”!!! If this situation does escalate even further, it should have a much larger impact on the markets before too long. Therefore, even though investors should avoid “acting” on these new developments, they should still be “forming a plan” for what to do if the situation deteriorates in a much more meaningful fashion. (That plan could and should be adjusted as things play-out, but we strongly believe that those who have a plan in place IN ADVANCE will have a much better chance of navigating a more significant disruption in the markets in a much more positive fahsion.)

These new uncertainties should keep oil elevated for longer than it did back in September (after the oil field drone-strikes).

One area that should see a much stronger move if (repeat, IF) the situation deteriorates in a substantial way would be the oil markets. Although crude has rallied on this news, this move has been just at muted as the move in the stock market. Therefore, a significant move in crude oil could be very, very important. (Remember, the last two bear markets were preceded by a major increase in oil prices.)

With this in mind, we believe investors need to be looking at what energy stocks they’d like to buy if WTI rallies in a material way from current levels. A lot of these companies have a lot of debt, so there could/should be a wide divergence between the action in the energy sector during any rally. However, this is a sector that is coming off of an extended period of under-performance…which has left the sector VERY under-owned by the institutional community.

Therefore, if the group starts to rally in a more meaningful way, those institutional investor will have no choice but to pile into the energy sector…so that they can get raise their weightings in that sector. In other words, the “demand” side of the “supply/demand equation” for energy stocks should grow a lot more than it normally would when oil has rallied in the past……Therefore, the energy sector should be at the top of any “contingency plan” investors put into place going forward.

Gold is breaking key resistance, but it is getting very overbought on a short-term basis.

Finally, we’ll just add that gold has broken above the key $1,550 resistance level this morning…in a (further) flight-to-safety trade. However, it is also getting VERY overbought on a short-term basis…with its daily (14 day) RSI chart giving us a reading above 87. This does not mean gold cannot rally further…and that its daily RSI cannot get even more extreme.

However, this morning’s reading is equal to its highest reading this century…and higher than it was at gold’s all-time high in 2011! Therefore, investors need to be very careful about chasing the yellow metal in an aggressive manner up a these levels. (We would point out, however, that gold HAS become much-more overbought on a weekly basis in the past, so gold can go a lot higher over the intermediate-term. However, it’s upside potential over the very-near-term could/should be somewhat limited.)

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Jan 06, 2020 — 9:01 AM
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