Tuesday, June 1, 2010

An acid test for the markets

How a jittery market react to news is an important test of future direction.

Consider the news over the weekend of the Israeli raid on the aid flotilla that left at least 10 dead. (The fact that one of the ships was called the Rachel Corrie does not help Israel's image.)

I am not here to judge who is right or wrong, but to see how events like this affect market reaction. Turkey has called for an emergency meeting of NATO, the implication being that she could invoke Article 5 of the NATO Charter which states that an attack on any member state is an attack on NATO itself [emphasis added]:

The Parties agree that an armed attack against one or more of them in Europe or North America shall be considered an attack against them all and consequently they agree that, if such an armed attack occurs, each of them, in exercise of the right of individual or collective self-defence recognised by Article 51 of the Charter of the United Nations, will assist the Party or Parties so attacked by taking forthwith, individually and in concert with the other Parties, such action as it deems necessary, including the use of armed force, to restore and maintain the security of the North Atlantic area.
Turkey invoking Article 5 would  be the nuclear diplomatic option for that country. At the time of this writing Ankara is raising the stakes by threatening to escort future aid convoys with the Turkish navy. Such actions would threaten the NATO alliance in so many ways that I couldn't even begin to name. Not only that, such a rupture may not be taken kindly by the markets.

When the bulls were in control of the tape a few months ago, the markets would have shrugged off this news. Today, with the markets jittery but deeply oversold, such an event serves as an acid test to see whether the bulls, bears or the undecideds are in control.

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