A Comment -- General Comments From an Expert (A Commentary)

He rebalances positions as weighting drops or increases. This forces the team to evaluate every stock that's not moving with the market. When a stock drops, (and as long as there's no reason not to) they buy more to bring it back up to the target weighting. Same thing in reverse on the upside.

He waits and watched event-driven cycles like this US-Israel-Iran war. Don't react to what Trump says on a Tuesday, because it could change on a Wednesday. Certainly, don't change your investment stance. Be long term and buy good companies which will act away from the current noise. Oil companies haven't reacted like oil prices have, and see current moves as event-driven. 

We haven't seen too many spikes like this in history. This has been an over 4 standard deviation move, which hasn't happened in the last 50 or so years. Significant.

The lag time for any pullback depends on what happens with the reason for the spike in the first place. Typically, these moves tend to come back down to a normal trading pattern over 3-6 months.

His team has a dashboard of signals, and there's one called the "early warning indicator". It gives a signal of potential weakening in the market, usually a few months in advance. It's like a flashing yellow light. 

A few weeks ago, it turned negative for both the S&P and the NASDAQ. Still remains positive for the TSX. 

With market weakness last week, his intermediate indicators (a weekly timeframe) turned negative for the S&P and NASDAQ. TSX continues to be strong, which probably has a lot to do with its makeup -- energy and materials. Financials have been weaker the last week, but have had a really strong year.

One of the things he's watching is the volatility index. Though not at historic highs, it's still very high right now and that makes it difficult to put capital to work. When it drops below 20, that's when he'd feel more comfortable moving cash from the sidelines.

Last week we talked about markets pricing in the anticipation of an event. Typically, the happening of the event is a good catalyst to take a profit on the trade. The energy sector really ramped up on stocks and underlying commodities, but now the sector (in US and Canada) isn't making higher highs from when it opened last Monday.

How long it will be a catalyst for market volatility could be weeks, probably won't be months. But certainly longer than it was initially suggested from the US administration.

It's got to be sticky here. Doesn't think the world adapts well to WTI over $100 a barrel. We've seen examples in the last 15 years where that's been the case, with economic weakness to follow.

The consumer can generally deal with a month or two of slightly higher gas prices. But after 6-12 months, it starts to eat into other consumption.

If you're a trader and on the screens all day, then you can react to the latest headline and trade the energy stocks back and forth. But you have to be watching everything that could come out of the White House and the Middle East, and you're competing with the trading desks around the world that do that.

The average investor shouldn't be doing that. During events like this that cause market dislocation, you should be looking for opportunities.

Nat gas is harder to distribute than crude oil, given that it needs to be liquified and there isn't enough global capacity to do that efficiently. Vast majority of distribution through Strait of Hormuz is on the crude oil side, so less (though some) impact on natural gas.

He's not an expert, but there's probably some capacity that can be turned off and on more easily. They're not shutting wells off completely, just slowing production. Geopolitical events tend to be short-lived and shocking, so he'd be surprised if wells were being taken off totally.

You want something tax-efficient, as it looks as though these proceeds are in a taxable account. With a bond, you'll pay full tax.

Look for a preferred security, with no reset but with a dividend, will have a tiny bit of risk, but will pay you a higher after-tax yield than what you'd get in a money market instrument. He can't recommend a specific one.

You don't want to be in equities if you need the $$ within this timeframe.

Private markets will be way better in the long run despite current noise. What's happening in those markets is due to the average investor not understanding the liquidity constraints around private credit markets. They're intended for very long-term investors. A lot of people see headlines, then sell first and ask questions later.

Impact of Higher Oil Price

Geopolitical events like this are short-lived, and you never know when they're going to change. Markets have been trading red for most of the day; a headline just crossed the tape where Trump says the conflict won't last even 4-5 weeks, and now markets are green.

You need to look for areas of dislocation. In this case, it's which sectors is oil a big input cost? Airlines and cruise ships. It will also impact consumer discretionary like clothing, and areas sensitive to inflation. Not consumer staples.

Don't run out and buy everything today. He hasn't bought yet, but is writing options to generate income. In a couple of weeks, these stocks might get a bit cheaper, and that's when you want to be accumulating.

It won't be safe to buy stocks until the Strait of Hormuz is open to traffic. Once this happens, the market will go higher. We're not out of the woods. During war, oil goes up, stocks go down.