Iraq Is Back - Is It Time To Panic?

The situation in Iraq has become the primary focal point of the markets over the last few days. Thus, the question of the day is if geopolitics in Iraq will become the next "crisis" the stock market will have to deal with.

As one may recall, there have been at least a couple false starts in the "crisis" category already in 2014. First, there was the emerging markets currency "crisis" in January as an overbought, over-believed and potentially over exuberant market was treated to worries about money flowing out of some emerging market countries. But, after about eight trading days, this "crisis" soon fizzled and the S&P 500 moved to new all-time highs soon thereafter.

Related Link: What The Next Decline Will Likely Tell Us

Next came the "crisis" in Ukraine/Russia. Recall that after 25 years of being part of Ukraine, the people of Crimea decided that they wanted to return to Russia. The worry here was that Putin would continue to annex new real estate and WWIII would soon follow. To a certain degree, this "crisis" is still present as Monday's headlines point to new tensions over payment for natural gas flowing to Ukraine. However, the bottom line is that the S&P is only four days and 0.77 percent removed from the most recent all-time high.

And now... it appears that it's all about Iraq.

Here's the Latest

The al-Qaeda-backed group ISIS has taken control of multiple towns in the north and is reportedly moving toward a showdown in Baghdad. Over the weekend, there were reports that the Sunni insurgents have killed up to 1,700 Iraqi soldiers and the U.S. State department is starting to evacuate personnel from the embassy, which is the largest U.S. diplomatic post in the world.

Cutting to the chase, it appears that Iraq is once again on the brink of civil war and given that Iraq produces a fair amount of oil and the U.S. has a history of jumping into the country militarily, the question is if a new war/crisis is brewing.

Perhaps the best way to determine if the markets truly care about a given topic at any point in time is to check in on the charts of various asset classes and "listen" to the message.

First up is the stock market itself...

S&P 500 - Daily

As far as the S&P 500 is concerned, the bottom line is that before the buzz about Iraq began, the market had broken out into a new leg higher and had just completed hitting a series of fresh all-time highs. The joyride to the upside had produced an overbought situation and an environment that was vulnerable to bad news.

The key is that stocks were "ready" for a pullback, a consolidation or simply a pause that refreshes. As such, the news in Iraq gave the bears something to focus on.

Next up is oil...

U.S. Oil Fund (USO) - Daily 

Conflicts in the Middle East are always about one thing and one thing only: oil. Therefore, when looking to determine if developments are important to the financial markets, traders need look no further than a chart of oil. In this case, the chart of the U.S. Oil ETF will suffice as it is available just about everywhere for free.

Related Link: Confused? The Current Market Is Too

From a short-term perspective, it is clear that oil has been moving up since the low seen in January. In addition, there has been quite a spike over the last week. Thus, oil would appear to be concerned that things are indeed heating up in the Middle-East.

U.S. Oil Fund (USO) - Weekly 

However, from a longer-term perspective - this chart plots the price of the U.S. Oil Fund weekly back into late-2006 - oil has yet to break above the range that has essentially been in place for more than five years.

SPDR Gold (GLD) - Daily

Although the price of the GLD has clearly perked up over the last four days, it is also clear that this security remains in an intermediate-term downtrend that has been intact since early-March. So, to see if there is more to the story, look at to the longer-term picture.

SPDR Gold (GLD) - Weekly

The weekly chart of the GLD ETF makes the case that investors are clearly not panicking into gold at the present time. In short, there hasn't been any meaningful advance in the price of gold. And if this were a real "crisis," one should expect to see the GLD popping to the upside.

Next up are the ultimate "safety trades" - U.S. bonds and the dollar.

10-Year U.S. T-Note Yield- Weekly

One could argue that the weekly chart of the yield on the U.S. 10-year shows that yields are falling. However, look closely at the chart - yields have actually increased over the last couple weeks. This is the exact opposite of what would be occurring if a real crisis were at hand.

PowerShares U.S. Dollar (UUP) - Weekly

The same story can be told using the chart of the U.S. dollar ETF (PowerShares U.S. Dollar - UUP). When traders around the globe really get nervous, they tend to flock in unison to the relative safety of the greenback. While this ETF has moved up off of the May lows, this chart simply does not suggest that a panic of any kind is underway.

Speaking of fear... lastly there is the CBOE Volatility Index - aka the fear index.

CBOE Volatility Index - VIX - Weekly

Yes, it is true that the CBOE Volatility Index has moved up a bit over the last three days. However, as the weekly chart indicates, the VIX has also been moving up from the lowest level seen since 2007. So, again, not exactly the stuff that market panics are made of.

The Bottom Line

To be sure, traders and their high-speed computers will be focused on any and all developments in Iraq. As such, the market will likely move on every headline out of the region. It is safe to say that this will create an increased level of volatility relative to what has been seen lately.

However, after reviewing the key charts, it is also clear that there is very little, if any, panic in the air at this stage of the game. Yes, futures are down again this morning on word that staff is being moved from the U.S. embassy in Baghdad. However, from a big-picture standpoint, this does not appear to qualify as a major crisis for the markets.

But it would probably be a good idea to continue to monitor all of the above charts as this situation unfolds. Remember, risk can happen fast in this business!

Positions in stocks mentioned: SPY

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