In a single word, the trend.

Recall the Iceberg Model, and how it provides an easy way to figure out what truly matters in complex systems like financial markets. In the context of Russia and Ukraine, yesterday’s onset of war sits on the topmost level of the Iceberg Model – Events.

Events are at the top of the Iceberg Model simply because they are the most visible parts of complex systems. This mirrors icebergs in real life, where only about 10% of an iceberg is visible above the waterline.

Since everyone can easily see them, that’s what they focus on. Which is dangerous, because it’s the 90% hidden from view that truly matters.

Yesterday’s price action saw most markets trade in a knee jerk fashion to the Event of war. This meant a sharp violent move up (or down) in most markets, followed by a quick and almost equally sharp reversal in the opposite direction.

While many will rush to attribute the reversal to some news headline that makes the most sense to them, that’s still only focusing on events. And, as yesterday’s rollercoaster so clearly demonstrated, trading based on events in a time of extreme volatility and uncertainty is very dangerous.

Why?

Because the market can flip on a dime, maybe multiple times in a day, crushing your positions every time it does so.

Which begs the question, how should we trade or position ourselves in this market?

As mentioned above, and highlighted in yesterday’s Macro Edge:

By focusing on the trend.

Here are some charts to provide a current, real life example; beginning with oil, the market everyone’s been forced to talk about. 

WTI spiked yesterday to a high just about $100 a barrel, before falling back to close at around $92 a barrel, a heartstopping $8 intraday round trip.

For some context, the last time the average true range (a technical indicator measuring an instrument’s volatility) was higher than yesterday’s reading was at the height of April 2020’s sell off.

Which demonstrates the sheer amount of panic, fear, and uncertainty in the market – considering that April 2020 was when front month WTI fell to a low of $-40!

However, as you can see from the chart above, yesterday’s move isn’t much when taken in the context of its overall trend, which is what truly matters.

What the trend clearly shows is that, for the past 2 years, supply has not been able to keep up with demand, because that’s what an uptrend in commodities prices means.

Of course the Russian invasion of Ukraine adds uncertainty to the supply picture, as buyers have already shied away from purchasing Russian crude. This anticipated supply disruption quite naturally drove WTI above $100.

As prices tumbled back to $92 later on in the day, the move was attributed in some circles to Biden’s announcement of an international effort to release emergency oil reserves.

On the surface, i.e. only focusing on Events, this would explain the price move. Since fears of a supply disruption drove the price up, allaying these fears would drive the price back down. 

But how much does a release of oil reserves actually help?

Not very much. Governments simply do not have enough oil held in reserve to make a sustained dent in prices. 

In other words, the events here don’t really matter if one is long oil based on what the trend is telling us.

Sanctions on Russia are most probably going to be held in place for the medium term. This could translate to a tighter global supply of oil if traders become increasingly reluctant or unable to purchase Russian crude.

All of which is bullish for oil, sure, but the trend has already told us that supply was tight relative to demand even before the onset of war.

On the other hand, governments releasing reserves won’t do much to ease the supply-demand imbalance in the medium term. This is a reality that won’t change, as much as the price of crude may gyrate in response to headlines over the coming days.

Again, it’s the trend that matters.

As such, if you find yourself confused by the miasma of volatile price action and the constant barrage of war-related headlines, don’t be.

Just be aware of how your positions in various markets stand relative to their underlying trends, and make the necessary adjustments in accordance with your overall risk management strategy (position sizing, stop loss placement).