What if Putin does the unthinkable and how to protect ourselves from it
By Jani Ziedins | End of Day Analysis
S&P 500 futures fell as much as 2.5% during Monday’s overnight session as Russia’s war with Ukraine continued over the weekend and the West tightened the sanction screws on Russia.
But those overnight losses moderated by the open of regular trade to minus 1.5% and even better, the index finished the day down a very modest 0.2%.
While volatility remains off the chart, the index is trading amazingly well given the start of the largest European invasion since WWII. But as I told readers two weeks ago, this paradoxical behavior was expected:
This phenomenon of uncertainty being worse for stocks than bad news is what allows stocks to actually rally once bullets start flying.
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Well, that’s exactly what happened. While this crisis in Ukraine has turned into the worst-case scenario as Russia launched a full-scale invasion, US stocks have actually rallied nearly 7% from Thursday’s open. That’s not what a rational person would expect, but the stock market rarely does what it is supposed to do, so this mindbending move is par for the course.
While it feels a little strange to be profiting off of this conflict in Ukraine and my heart goes out to all of the people affected by this dreadful situation, I’m a trader by nature and when I see a great trade, I cannot help myself.
And given the market’s resilience Monday in the face of escalating economic sanctions, the stock market feels pretty comfortable economically with the way the situation is progressing on the other side of the world. While a massive human tragedy, the impact on US corporate earnings will be limited and is already largely priced into stocks.
As well as the index is acting, there isn’t much to do here except lift our stops to the 4,300 region and see if there is more upside left in this huge bounce.
That said, there is one risk that hasn’t been accounted for in US financial markets and that is Putin getting desperate and using tactical nuclear weapons to beat Ukraine into submission. Flatten one Ukrainian city with tactical nukes and the US stock market will open down 25% or more.
While this scenario seems highly unlikely, that’s the way many people felt about a full invasion early last week. That makes this a good setup for a bifurcated trade. Continue following the indexes higher with a conventional trade but buy a little insurance against the unthinkable by picking up some out of the money puts.
I typically don’t mess with options, but this is one of those cases where they make a lot of sense. The other alternative is staying in cash, but it is hard to resist these profits, so I will continue taking what the market gives me while using stock options to protect my backside against the unthinkable.
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