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Middle East Conflict Fallout: 3 Market Surprises

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Tensions Escalate in the Middle East

Saturday, October 7th, the centuries-old Israel vs Palestine conflict escalated to reach modern-day highs of violence, destruction, and uncertainty. Funded by Iran, the Hamas terrorist group attacked Israel from all angles. While scuffles in the Gaza Strip are nothing new, the difference this time is how successful Hamas was in infiltrating Israel, which is thought of as having the world’s best security (barbed wire border fence, best-in-class defense technology, & the β€œIron Dome” missile defense system.

How Will the Middle East Conflict Impact Stocks?

β€œThe game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick-adventurer. They will die poor.” ~ Jesse Livermore

Though most of us hope for peace and a resolution to the conflict, investors must separate themselves from their emotions and continue to size up the market in an unbiased fashion. However, as investors who have experience understand, the market can never be taken at face value. For example, if investors had a time machine and knew geopolitical events ahead of time, most would not gain a significant edge. That’s because markets are the master manipulator, constantly discounting the future and questioning our assumptions. Below are the 3 biggest Wall Street surprises since the conflict started:

Oil: Sell the News?

The US Oil Fund ETF (USO) has been nearly flat since the Middle East news broke. Obviously, the Middle East is critical to energy markets, especially the shipping of oil. The action in the oil patch is a classic case of the β€œsell the news” phenomenon. Even a rumored $60 billion mega-deal of ExxonMobil (XOM) buying Pioneer Resources (PXD) could not get most oil stocks into gear.

Zacks Investment Research
Image Source: TradingView

Interpretation: Oil investors with large profits from the 2023 bull move likely are using the β€œliquidity event” of the Middle East conflict to take profits in the short-term. Unless the war escalates dramatically, expect oil to consolidate in the short-term.

Leading Israeli Stocks are Surprisingly Resilient

Many experts say that the attack on Israel is β€œIsrael’s 9/11.” Nevertheless, in the face of an escalating conflict, two of the most popular US-traded Israeli stocks are exhibiting strength. Cyber security leader CyberArk Software (CYBR) and autonomous vehicle technology firm Mobileye (MBLY) are down less than 10% on the week.

Since 2018, CYBR has grown revenue consistently and dramatically as the list of data breaches grows even longer.

Zacks Investment Research
Image Source: Zacks Investment Research

Interpretation: Volatility is to be expected in Israeli companies, given the geopolitical fallout. However, should the conflict de-escalate, CYBR and MBLY are positioning themselves as leading stocks.

Breadth has Improved

US equities shocked investors by gaining ground since the invasions. Even more surprising is that since the attack, equal-weight indexes like the Nasdaq 100 Equal Weight Index ETF (QQQE) are outperforming the Nasdaq 100 ETF (QQQ).

Zacks Investment Research
Image Source: TradingView

Interpretation: The fact that stocks are rising in the face of bad news is a bullish sign. Furthermore, a lack of breadth (participation), a key bear argument in 2023, is dissipating. In conclusion, though the news of war is sad from a human perspective, US equities indicate that they are not largely impacted. Β 

Bottom Line

In the wake of escalating Middle East violence, several surprising developments have emerged in the stock market. Oil is weak, Israeli stocks are flat, and equities are strong.

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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report

Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report

Invesco QQQ (QQQ): ETF Research Reports

United States Oil ETF (USO): ETF Research Reports

Mobileye Global Inc. (MBLY) : Free Stock Analysis Report

CyberArk Software Ltd. (CYBR) : Free Stock Analysis Report

Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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