My Thoughts on the Market as Russia Invades Ukraine

Posted On February 22, 2022 3:37 pm

As I mentioned last week, I’m currently on the road with my daughter taking some college tours; so I’ll be brief. I know she’ll always be my little girl.  But gosh, kids look so young these days!

Here’s another eye-rolling cliche, “Buy at the sound of cannons, sell at the trumpets,” attributed to Nathan Rothchils in 1810. This was a reference to Russia preparing to take over Crimea. Stocks suffered their worst week in two-plus years as Russian troops gathered on the edge of Eastern Ukraine ahead of an invasion.  History doesn’t repeat, but it sure does rhyme. 

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Two other instances from my lifetime proved the wisdom of this advice; the Kuwait/ Iraq invasion and the Afghan/Iraq war. In the lead-up to the events, stocks sank on a near-daily basis and oil rose. During the first gulf war, when Hussein first invaded Kuwait in 1990, oil gained some 45% over the two years prior to 1993 U.S. involvement. Once it was clear that the U.S. would get involved militarily, oil jumped 15% in a week.  However, once the first bombs were dropped, so did oil’s price. Within a month, it’s trading back below $20 per barrel.  Meanwhile, the stock soared starting a multi-year rally that peaked with the dot.com bust in 1999. 

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About a decade later, in the wake of 2001’s World Trade Center bombing, we saw similar price action among assets.  Stocks down, oil and treasuries up, leading into the reaction. All reversed within days of the first bomb hitting the ground. 

Obviously, as always, the circumstances are different this time. Two key differences that may make this situation a game is there are already high inflation levels, especially energy-related ones. People in Europe are literally losing their ability to heat their homes. The suggestion from Ovo, Britain’s largest energy producer, “to eat porridge and cuddle their pets” to stay warm was not well received.  Germany is not as bad at the moment, but in a very vulnerable position as it imports 57% of its oil from Russia. 

With the Russian invasion seeming imminent, we’ve seen stock suffer their worst week since mid-January (the worst month in a decade-plus) with the major indices within spitting distance of the January lows.  Oil crossed above $90, it’s highest level in 7 years.  And bonds have caught a safe-haven bid, even as the Fed is about to start raising rates and extract market liquidity. 

It appears that the U.S.will refrain from putting troops on foreign soil — as they did in Iraq and Afghanistan.  However, it won’t mean it’ll be insulated should there be a major conflagration across Europe.  Fun fact: In its 246-year history, the U.S. has invaded or has been militarily involved against 191 countries; there are only 193 recognized countries on planet earth. I guess that’s why we need a Space Force.

Anyway, since last week, Options360 has been whittling down our position and now just holds bullish positions in Best Buy (BBY) and Capital One (COF), and a Facebook (FB) iron condor.  All three are coming under pressure today. However, I’m restraining myself from making any hasty or panic-induced adjustments. 

If history is any guide, one should start scaling into long positions, especially in consumer discretionary, travel, and leisure. But I don’t feel the need to be a hero.  I’d rather wait for the clear sound of trumpets. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.