When I was in the military, I often deployed to one of the world’s hot spots. When I got there, I always posted a chart showing the price of oil. I learned that when oil prices fell, the crisis was over and we’d be going home soon. This is a real-world application of the efficient market hypothesis.
Market prices are forward-looking and efficient. This means that the current prices include all available information. No single trader knows everything, but efficient markets assume that all traders, as a group, know everything. This is good news for those worried about the situation in North Korea.
Of course, there’s no stock market in North Korea. But there is a market in South Korea. This market is located within range of North Korea’s artillery. In fact, the stock market would be unlikely to survive a war.
Current prices tell us that traders expect this crisis to be resolved. The Korea Composite Stock Price Index (KOSPI) 200, the benchmark index for South Korea’s stock market, is near new all-time highs.
If traders were worried, the trend would likely be down instead of up.
The chart above shows that the South Korean stock market is unusually volatile. The country’s economy has usually delivered strong growth, which accounts for the upward trend. But the country has faced many crises in the past few years. These crises, including this year’s impeachment of the president, account for many of the sharp down moves.
For now, the chart tells us to expect a peaceful resolution to the latest provocations by North Korea. If this trend breaks down, it will be time to worry.
Michael Carr, CMT
Editor, Peak Velocity Trader