Resource World Magazine

20 www.resourceworld.com F E B R U A R Y / M A R C H 2 0 2 0 Speculations by Leonard Melman T here are many ways to trade mar- kets. As a former broker, I have seen some investors taking long range positions based on fundamental information as their preferred method. For others, reliance upon investment advisors or counsellors is their choice. However, for many others, particularly those attempt- ing to 'scalp' the markets, their preferred method is to attempt to react swiftly to important news developments, either posi- tive or negative. Judging by the events of early January, this method can carry a high level of risk. An examination of trading in Crude Oil between January 2 and January 8 illus- trates the possible rewards to be earned by trading on news, but the potential pitfalls as well. Late in the evening of January 2, the United States military, acting on orders approved by their Commander-In-Chief, President Donald Trump, one of Iran's leading – and most controversial – military leaders, General Qassem Soleimani, was assassinated outside the Baghdad airport. Not unexpectedly, immediately follow- ing the release of this news, the oil market soared from near $61 to just under $64/ bbl. (All figures in US dollars) The appar- ent rationale behind this rise was that Iran might retaliate by closing the Straits of Hormuz through which about a quarter of the world's petroleum production passes. However, when they failed to take that action, crude stabilized and traded within a range from $62-64 until Iran suddenly unleashed a barrage of missiles against two American military posts late January 7. Crude made another surge, this time to $65.60 before America announced there were no casualties and limited property damage and upon that news, crude col- lapsed with stunning swiftness, falling to just $59.10 the morning of January 8. It is interesting to note that the gold market reacted to this sequence of events in an almost exactly duplicate pattern, rising from $1,555 to $1,590/oz; falling back to about $1,560; soaring to a peak at $1,615 before falling swiftly to $1,545 before stabilizing. Lest anyone think that reversal of early market reactions to news is rare, I would suggest it is not. I recall two other events where the initial reaction to news reversed itself with stunning rapidity. The first took place on March 20, 2003, the night when American forces first fired on the Iraqi forces of Saddam Hussein in the opening salvos of the Iraq War. As you may recall, America had built up massive forces in the region and war was an open threat. Finally, America troops let loose with a barrage of missiles fired against Iraqi posi- tions near Baghdad. Many believed that Iraq would mount a vigorous defense and a major war might be underway – a war which could easily inflict major damage on the world's petroleum supply systems. Accordingly, this fear immediately drove the oil markets dramatically higher. Crude exploded upward from near $32.50 to $40.00/bbl in a matter of just a few min- utes. Gold made a similar move from $340 to $388/oz. However, news then flashed across the screen that American troops had met vir- tually no resistance and major war fears vanished. Not surprisingly, both mar- kets immediately reversed directions and plunged, oil falling to $26.30 and gold to $325 before each finally found some trad- ing support. Traders who bought on the first news, quite literally, had their financial heads handed to them on a platter. The other episode took place on election night in 2016. Virtually the entire world assumed an 'automatic' victory for Hillary Clinton. However, as news of Trump win- ning one state after another pointed to a Trump victory, the Dow Industrial futures plunged as early traders assumed much of the financial world would panic. For a short while, it did, as the Dow futures plunged from 17,700 to 17,000 and those who 'shorted', say at 17,500 were pleased. However by the end of the night, the Dow wound up ahead by 200 points to about 17,900! The entire subject of trading on news is puzzling to many, in particular to par- ticipants in the world's oil markets. A recent study by financial writer Joe Chidley which appeared in the National Post newspaper addressed this dilemma. Chidley wrote that upon hearing of the recent assassination and the subsequent missile attack,'…oil prices spiked, global stock markets reeled, gold shot up, (and) bond yields fell." But then it all quickly reversed and Chidley's answer for 'why?' was, "…Reports of WWIII have been greatly exaggerated and so have wor- ries about collateral damage…" 'Trading on news' seems to me to be inherently dangerous. In fact, it reminds me of the title to a 2007 financial book authored by Danielle Park, the title of which is Juggling Dynamite. How appropriate for this subject! n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@ shaw.ca Stock trading on non-corporate news – a risky strategy

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