Why The Ukraine Headline Does Not Pass The Sherlock Holmes Test

I mentioned on Tuesday afternoon that I did not believe the market weakness was due to Ukraine Russia tensions. From Art Cashin, UBS head of floor trading, and a 5o-year veteran of the NYSE floor, expresses the sentiment much more eloquently than I:

One Of These Things Is Not Like The Other – Or – Why The Ukraine Headline Does Not Pass The Sherlock Holmes Test

This marks my 50th year as an NYSE floor broker. (I entered the world of finance in 1959 and by 1964, at the tender age of 23, had a seat on the Exchange.)

One of the first things I learned, even before the seat, was that a good broker needs to be a good detective, to look behind the easy or the obvious by comparing the reaction of different assets. Yesterday, I believe was a classic example.

As we walk through the action step by step, recall Monday’s action. We had said that if markets moved higher than Monday morning’s highs, the market would rally and so it did. With that as a backdrop, let’s look at Tuesday.

As suggested in the Comments, stocks opened lower, circled the wagons around 10:00 and then began a lot of churning and testing. Shortly before 11:00, I sent this note to friends:

Stocks zig and zag in response to moves in yield of the ten year Treasury. Equity types worry that bond vigilantes will seize the initiative from the Fed as firmer economic data shows up. The real goal posts sit at 2.44% and 2.65%.

Geo-political antennas are on alert.

The market kept testing itself and tried to find a trend. Shortly after noon, I sent this follow-up note:

Some buzz that Putin may restrict Siberian airspace to Western airlines, lengthening their air routes and raising fuel cost vs their eastern competitors.

On stocks, this morning’s low (Dow 16474; S&P 1926) now becomes a target for the bears.

Run rate at noon projects to an NYSE final volume of 650/730 million shares.

The markets continued its testing, with the bulls unable to produce any real bounce after the repeated testing of the morning lows. That was a worrisome sign and, at 1:15, I wrote this cautionary note (which, due to a mechanical glitch was not fully disseminated):

Dow and S&P hold just above the morning lows, so far. Yet, there has been no attempt at a double bottom bounce.

Oil sector weighs on market with Chevron and Exxon accounting for nearly 1/3rd of the Dow drop.

At any rate, the game is still on the table. Radio silent at 1:30.

I may have gone radio silent at 1:30, but the markets certainly did not. Stocks retested the morning lows and, when they broke through, a trapdoor opened. At nearly the same time, there was a statement by Polish FM, Sikorski, suggesting that a Russian invasion might be imminent.

Now comes the Sherlock Holmes part. In Silver Blaze, Holmes deduces that a missing horse was stolen by an insider because of something that didn’t happen. The dog didn’t bark so it could not have been a stranger. There were several things that didn’t happen yesterday.

In a classic reaction to a headline of a looming invasion of Ukraine by Russia, several things might happen nearly instantaneously. Stocks would plunge (check). Yields would drop (mostly). Gold would soar (not really). Oil would soar (it remained weak). I think the cumulative evidence suggests the bulk of the stock fall was due to internal technicals and not the easy, convenient and coincident comments by Sikorski.

The S&P even took out its Friday low of 1916, reaching 1913 which, conveniently, was the ultimate target of the broken head and shoulders I discussed a week or so ago. The closing volume at 702 million shares was hardly a stampede.