Richard Russell, the famous writer of the Dow Theory Letters, believes that something big is building in the markets.

What singular, momentous occasion does he think will set off a market frenzy? A nuclear stand-off between Iran and Israel.

In his Friday note, he said [emphases added]:

“I’ve been sensing something BIG and ominous is in the offing. What could it be? Ah, a front page article in Sunday’s NY Times supplies the answer. Israel will attack Iran with nuclear bombs. Israel must attack this year for this is the year when Iran will have nuclear capabilities.

Actually, the stock market is acting as though something momentous and frightening is ‘out there.’ The roof of a monster top is building. Gold keeps creeping higher.

If Israel attacks the Mid-East will go up in flames.

Suggestion — dollars and gold. If the dollar collapses, gold will make up for the losses by sky-rocketing.

The next target for gold — to trade into the 1800s, and it’s getting close.

The Dow is fluctuating around the 12700 area, not surging above it or falling decisively below it.

If you listen carefully, you can hear the heart-beat of the market. It’s a slow, heavy beat, as if the market is waiting for something. That something is going to be BIG. Bigger than what anyone is expecting.

2012 is fated to be a monster year. Keep your eyes on the dollar and gold, and the newspaper headlines!”

“It might sound farfetched, but the tension between the two countries is building with every day. As the LA Times noted just yesterday, there’s no telling where this is all headed,” writes Cullen Roche of Pragmatic Capitalism.

“The ripple effect would be staggering if tensions flare up into something bigger. The asset class most affected would certainly be oil prices as the Middle East would become a war zone again.”

However, while surging oil prices could be viewed as “bullish” for equity market, it would most likely be a repeat of last year when exponential increases in oil prices did little more than cause recession fears.

“I think it’s irrational to make big bets on outlier events like this, but if the headlines deteriorate it would be wise to understand the market impact before the market begins to price everything in,” Roche writes. “And yes, while gold would certainly benefit, oil prices would be the primary beneficiary…”

(H/T: Business Insider)

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