The market impact of the Israel attack on Iran & how to navigate the days ahead

TRADERS’ RISK CALL 19 Apr 2024

This week, we discuss the following:

We just experienced some market volatility today due to an escalation in the conflict between Israel and Iran. How does Vee think we should approach it? 

Transcript:

We just experienced some market volatility today due to an escalation in the conflict between Israel and Iran. So, what do you think of it? 

Earlier in the Asian morning, there was news of explosions heard in certain parts of Iran, and that Israel had launched an attack in retaliation for the Iranian missile attack over the past weekend. As a result, there was some panic selling in stocks, and buying of bonds, gold, and oil, along with selling in risk assets such as Bitcoin. Stocks were down 2%, and now it’s about maybe less than 1% down on the day. Bitcoin dropped more than 6% but now is just down 2% on the day. Gold was up nearly 2% and now it’s unchanged. Oil was up 4% and now it’s just about 1.5% up on the day, and 10-year US bond yields dropped 13 basis points and now it’s just 5 basis points down on the day. These are typical reactions when markets are uncertain; investors will seek safe havens, they will buy US bonds, sell stocks, buy gold, and sell speculative assets such as Bitcoin. And of course, because this is a Middle East conflict, it possibly affects the supply chain of oil. As a result, oil prices went up, and of course, it has reversed a bit and reduced some of the losses because Iran told the world that there was no attack, the nuclear sites are safe, and it’s not a big deal. Of course, this is very confusing because US officials confirm, according to news reports, that there really was an attack and that explosions were heard, but I guess the Iranian side dismissed it as the explosions were just sounds of the activation of their air defence.

I think the point to note is that we are sitting in front of our screens, of course, even though this is the age of the internet and Twitter, we may not be getting the best information on a timely basis. So, we have to understand that there’s going to be a high level of uncertainty even from the things that we read, a high level of inaccuracies. We’re never going to be sure what is actually happening and markets are moving so fast, and so much that before we can get confirmation, we could be pushed to levels where we have to stop out, right? It is important to understand this, not have strong views based on your personal view as to what should be happening in the Middle East or who should be doing what. If you have to separate fact from our emotions and be objective about what we truly know and what are just guesses on our part and we shouldn’t really be putting on too much capital on mere guesses which can be proven correct in the longer run, but in the short run, we could be stopped out, we could push the markets could go to uneconomic levels according to our perceptions because of this news. So even now we don’t know if there really is an attack or if it’s going to escalate further or not, but markets are moving. What is important to note is that we have to reduce our position size.

When markets have reached such uneconomic levels that we believe that yes, it’s going to be really an asymmetric outcome, right but even then we must respect the price action sometimes and manage our risk accordingly. So it’s important, position sizing needs to come down regardless of what it was before because of higher volatility now, it has to come down. We have to wait for extreme levels. And the best thing to do is to not have pre-committed views and to trade the uneconomical prices, the prices which have been pushed to extreme levels because markets are panicking. And the probability of this occurrence is high given the history of markets and my experience in markets I’ve always seen a lot of opportunities arising during volatile times like this and if you have too much of a position on you will be emotionally clouded you will be emotionally invested and sometimes you either be fearful or hopeful and it will deter you from capitalising on opportunities that may arise. So that’s the part about trading but then what do we think about the situation? I? Think no one really knows what’s happening, except the key players themselves. I believe they are also making decisions not on a long-term basis now, maybe they are planning for the long term, but they are also kind of responding to events as well, so it’s a clear case of things are fluid and in flux, so there’s no need to have big positions trying to bet on what they think or what they will be doing.

So one thing we need to note, this risk call is done on a Friday. The news is coming this morning earlier Friday in Asia and as the time trades towards the New York time zone and the end of the New York session, the thing that is on the mind of traders and speculators is going to be weekend risk. That’s 2 days. We’re not going to be sure what’s going to happen, what is Israel going to be doing over the weekend so that is going to be likely resulting in people reducing risk. Also, it’s important to note Passover, a Jewish festival, is starting from sunset Monday 22nd April for 1 week. So this is likely going to be an important period for the Jewish people. Earlier, the US said Israel is not going to attack during this holiday. So some people think retaliation will come after but of course now we are seeing it before so we’re not sure again. It could be something like they launch and then do what Iran did: which is to immediately end it and then say there’s no further escalation. We don’t want any trouble and just use rhetoric going forward. So we don’t know, there’s a lot of things that could happen. Anybody who says they know it’s likely to be guessing so it boils down to my original point of being nimble and keeping position sizing to a more conservative level and try to take advantage of the volatility instead of being victims of the volatility.

Another thing to note is that during times of short-term volatility like this, markets will sometimes move to uneconomic levels because people are just reducing their positions. They don’t care, they want to get out at any price that is available to reduce their risk. It will give us opportunities to build long-term positions, but of course long-term position doesn’t mean that we can ignore the short-term volatility, but you can temper the effect of the volatility by adjusting your position sizing, right? We don’t need to go all in at any point in time because anything could be happening in the short term. But if you really like a long-term position and it’s come to the level that you think you should build positions, just start building a small position sizing. And if you’re wrong the market continues to go against you, you still can add to it because your position size is not so big. But if you are right, it starts to move in your favour. Yes, of course, you will feel some FOMO. You will think that maybe you should not have listened to Vee that idiot. He doesn’t know what he’s talking about, but it’s always better to make less money than you should then lose more money than you want to. Okay on that note as always stay true to the process. Eventually, you will be profitable. Thank you.