Monday Buy Day
Equity markets sold off last Friday on the news that the Houthis have joined the war in the Middle East. This is significant because they can disrupt shipping in the Bab al-Mandab Strait, which is the 30 mile passageway to the Red Sea. About 9 mb/d of oil flows through that Strait, as well as 10% of global shipping traffic and 30% of containers (source: Perplexity). If traffic in and out of the Red Sea gets blocked by the Houthis, the disruption of global energy markets and shipping will reach calamitous levels.
US troops will likely commence military operations in Iran starting this week. We don’t know yet exactly what the objectives are, but they might be a combination of 1) Secure the Strait of Hormuz, 2) Extract Iran’s uranium, or 3) Take over Kharg Island. As traders it will be almost impossible to anticipate how quickly or successfully the US military will achieve its objectives in Iran, so my plan is to just react to extreme moves and read the market for news failure.
Equities are rightfully pricing in a very negative outlook for the war in Iran. Most positioning and sentiment indicators I follow have retraced to either neutral or bearish. If you are underweight or short equities here, positioning is no longer on your side. I’m pointing this out because it’s often the scenarios that look the most hopeless that are the best buying opportunities. Going short on Wednesday and covering on Monday has also been a reliable strategy that takes advantage of the natural cycle of human sentiment and news. For these reasons, I’ve covered my shorts in ES and TY futures, and have flipped to long futures as of this morning. After having raised cash earlier this month, I might do some shopping for the long term portfolio as well.
In the paid subscriber section: Why gold and bonds are now a buy and the ES chart pattern that will dictate my trading plan
