North Korea still doesn’t matter and how to profit from it

By Jani Ziedins | End of Day Analysis

Aug 10

End of Day Update:

The S&P500 sold off for a third day following Trump’s “Fire and Fury” threat to North Korea. The first two days of selling were relatively benign, but today’s defensive selling crashed through 2,460 support and the 50dma. This was the biggest single-day loss since mid-May and it puts us back to levels not seen in a month.

Thursday’s selloff felt especially dramatic since it came following a period of historically low volatility. Many traders assumed there was nothing to worry about and we would coast into the end of summer. Unfortunately for them today’s steep selloff reminds us there is no such thing as easy money in the market.

It is hard to talk about what is going on in the stock market without first dipping into geopolitics. This isn’t the first time we’ve gotten into a war of words with North Korea and it won’t be the last. But this situation is unique because no one knows how far Trump or Kim Jong Un will take it since both leaders are new to this high-stakes game of chicken. One miscalculation by either side could escalate this situation from words into something far more deadly.

Kim Jong Un’s primary “Trump” card continues to be the thousands of artillery cannons armed with chemical and biological weapons pointed at Seoul’s ten-million plus citizens. There is nothing North Korea can do to prevent us from bombing their nuclear program, but they can retaliate by attacking the civilians in Seoul.

Millions of hostages are what makes this situation so much different from the ones we face in the Middle East. Trump can talk a tough game, but unless he is willing to sacrifice millions of South Korean civilians, his hands are tied just like they were for all of his predecessors.

Most of the time these situations with North Korea diffuse themselves over a few weeks and things return to “normal”. There is a 99.9% probability this is what will happen here too, but that hasn’t stopped traders from reacting strongly to these headlines.

What started out as a little uneasiness earlier in the week turned into a mass exodus Thursday. This weakness was compounded by all the technical traders using stop-losses to automatically get them out of the market. While this strategy sounds good in theory, it can be tricky in practice because people often use similar support levels to trigger their stop-losses. That means any dip through a widely followed level will trigger another wave of autopilot selling.

2,460 has been support for several weeks and we violated that this morning. That lead to the first cascade of selling that pushed us down to the 50dma. Then Trump told the world his “Fire and Fury” threat wasn’t strong enough and that was enough to extend the selloff under the 50dma.

While this selloff feels scary, the thing to remember is risk is a function of height. Last week when we were trading at record highs and everyone was in a cheery mood was actually a far riskier place to own stocks than jumping in and buying this dip. While it definitely doesn’t feel like it, the discounts sellers are offering make this a safer place to buy stocks because a big chunk of the selloff has already been realized.

For months I’ve been saying this is a buy-and-hold market. Holding is an easy thing to do when the market is gently gliding higher, but holding through a dip hard to do when everyone around us is selling. Our natural instinct is to join the crowd and get out before things get worse, but then that is no longer buy-and-hold.

Every dip this year bounced and this time will be no different. If you don’t think the U.S. will start a war with North Korea, then this is a better place to be buying stocks than selling them. It takes courage to go against the herd, but take comfort in knowing it is a lot safer to buy this fear than last week’s complacency. Many of us have been praying for a buyable dip, here it is. Don’t lose your nerve now.

Jani

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Ian August 10, 2017

“Most of the time these situations with North Korea diffuse themselves over a few weeks and things return to ‘normal.’ There is a 99.9% probability this is what will happen here too, but that hasn’t stopped traders from reacting strongly to these headlines.”

By most people’s measure ‘most’ does not equal 99.9%. One would have to believe the trading action today does not embrace a near-impossibility of a negative outcome.

    Jani Ziedins August 10, 2017

    We will see. Either we go to war with North Korea, or we don’t. My money is on don’t, but nothing is impossible, that’s for sure.

Martin August 10, 2017

What I find funny is that the same crowd who was frantically selling today will be buying back tomorrow and usually on higher prices than what they sold off. I learned never react to this selling in my long term portfolio and in fact I am buying more shares in selloff like this one.

    Jani Ziedins August 11, 2017

    I totally agree. Some people give money away with their poor trading decisions, but I’m not complaining because they’re the ones selling me stocks at a discount.

      GENSE August 11, 2017

      HOW DO YOU FIGURE AMERICA IS THE AGGRESSOR?

      “If you don’t think the U.S. will start a war with North Korea,

      USING THE WORD “DONT” DOESNT GET YOU OFF THE HOOK

      IT IMPLIES THAT AMERICA IS THE AGGRESSOR

[…] start a war with North Korea, then this is a better place to be buying stocks than selling them,” Ziedins writes. “Many of us have been praying for a buyable dip. Here it […]

[…] a war with North Korea, then this is a better place to be buying stocks than selling them,” Ziedins writes. “Many of us have been praying for a buyable dip. Here it […]

[…] a war with North Korea, then this is a better place to be buying stocks than selling them,” Ziedins writes. “Many of us have been praying for a buyable dip. Here it […]

gense August 11, 2017

THE AUTHOR SAYS ITS AMERICA THAT IS STARTING THE TROUBLE WITH NKOREA

HOW DO YOU FIGURE THAT ?

“If you don’t think the U.S. will start a war with North Korea,

EVEN THOUGH HE USES THE WORD “DONT” IT IMPLIES THAT ITS AMERICA DOING THE AGGRESSIVE ACTIONS

    Jani Ziedins August 11, 2017

    So far there has been no action by either side and this is just a war of words. If Trump preemptively bombs Kim Jong Un’s nuclear facilities, that would be an aggressive act by the United States.

    If you want to claim NK’s decision to pursue nuclear weapons and intercontinental launch capabilities are aggressive acts, then by that logic the United States the most aggressive country in the world.

Ian August 14, 2017

Jani,
You were spot on in your analysis! I tip my hat to you.

[…] week I told readers “North Korea still doesn’t matter and how to profit from it“. Those that listened are a little richer this week. I don’t have a crystal ball and I […]

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