What a difference a few days can make! Secretary of State John Kerry's offhanded, rhetorical comment on Monday suggesting that President Assad could avoid a U.S. military strike by handing over all of his chemical weapons was, to everyone's surprise, taken seriously by Assad's ally Russia and Assad himself.
This has led to President Obama putting aside (at least for now) his plans for an imminent strike on Syria in order to pursue a more diplomatic resolution of the crisis. It appears that the U.S. Congress will also delay their vote on the use of force in Syria, hoping that diplomatic negotiations will resolve the crisis peacefully. From the point of view of financial markets (at least in the short-term), an intense and imminent crisis has now cooled off, and the ever buoyant broad stock market has responded positively to the news. Since Monday the DOW has risen over 300 points, and my decision to cover short positions in this market that day seems to have been a good one. In Sunday night's blog I also suggested waiting for the DOW to exceed 15,300 to sell it short again with the caveat that technical signals don't turn bullish. Important indicators in the DOW, S&P 500 and NASDAQ have been turning bullish this week (most likely due to the easing of the U.S. war threat) and directional momentum in all three of these indices is at the moment 100% bullish. This factor is making me very apprehensive about selling short now. The DOW is approaching that 15,300 level today, so we will watch and see if this rally starts to stall before considering any shorting strategy. I still feel that a more serious correction in this market will happen before the year is over, but the current bullish momentum may indicate it is being delayed some more. Another factor that may be giving the DOW a lift this week is the U.S. Labor Department unemployment report which came out last Friday (and was overshadowed in the news by the Syrian crisis) and was quite negative. Negative news about the economy decreases the likelihood of the Fed starting its policy of QE tapering (which the market greatly fears), and so, while it may seem contradictory, depressive economic statistics tend to push the DOW up these days. Note, however, that September and October are often bearish months for the stock market, and that while the Syrian crisis has cooled for the moment, it is not over, and markets may be quite volatile over the next month or two. Standing on the sidelines of this market for now.
This week's reevaluation of a U.S. Syrian strike seems to have had a slightly bearish effect on the price of the precious metals which had seemed ready to rally strongly on the beat of the war drums. Timewise and pricewise we are falling into an ideal buy spot for gold and silver right now, but many gold and silver stock indices are suddenly flashing strong bearish signals this week. As I've mentioned before on the site, precious metal mining company stocks often lead the price of the metals themselves, so this may be pointing to some more downside in gold and silver prices. There are a few short-term technical signals that also look a little bearish at the moment, so I am holding off buying today. Momentum in silver and gold metal is still bullish (especially silver) so there is the potential for a strong rally here. I am watching now for a short-term buy signal and am anticipating going long either tomorrow or on Friday. On the sidelines here and waiting to buy.
Not surprisingly, the price of crude oil plunged yesterday with the sudden news of a potentially peaceful resolution to the Syrian crisis. This kind of volatility associated with a conflict in the Middle East is exactly why we are on the sidelines of this market right now. In terms of technical signals and cycles, this market is ambiguous in its direction short-term. It could either continue down into a serious correction (especially if it breaks below $102) or rally back up and break though the recent high at $112. Momentum is still strongly bullish so this latter scenario is quite possible (especially if U.S. war drums start beating again). On the sidelines of this market.