Learning The Crisis Play Book

By Dave & Donald Moenning, Marketfy

What a difference a day makes, right? On Monday, the bears could be heard telling anyone who would listen that the sky was indeed falling in response to Russia's "invasion" of Crimea.

The idea being promoted was that Vladimir Putin was doing his best Saddam Hussein imitation by planning to annex some additional beach-front property for Mother Russia. Those traders dressed in their fur caps suggested that the West would object, sanctions would fail and before you could look up the spelling of Ukraine's new President, World War III would be at hand.

Oh, and lest we forget, there was also talk of the economic calamity that was sure to ensue. Remember, Europe gets one-third of its oil from Russia via pipelines that run through the Ukraine. Therefore, once troops started moving and the drones started flying their bombing missions, the Eurozone was sure to sink back into recession.

A Funny Thing Happened on the Way to the Ultimatum

To hear the fast-money types tell it, Tuesday was supposed to be a very tough day to be in the stock market. You see, there were reports on Monday that Russian forces had issued an ultimatum to the Ukrainians that they'd best stand down on Tuesday, or else.

The assumption was that the Ukrainian troops would hold their ground, that Russian troops would respond by force and that the internet would soon be filled with video of the violent conflict taking place in Crimea.

But the deadline came and went, and there were no shots fired. But then Russian President Putin mentioned that Russia didn't want to annex Crimea and that military action was a measure of last resort.

Boom. Just like that, the crisis in Crimea joined January's much ballyhooed emerging markets crisis in the "little crises that couldn't" category.

Soon there was word that Russia's military forces were backing off (reports indicated that the military "exercises" in the area, which had been scheduled for some time, had ended and that the troops were heading home). Suddenly, the fear was gone. Suddenly, the WWIII scenario seemed silly again. And suddenly, the bears were scrambling for the exits.

Were You Surprised?

Let's see a show of hands... who was surprised to see U.S. stock futures up 20 points before the market opened Tuesday?

Anyone surprised by Tuesday's spike higher - and this includes the masters of the macro universe who were so sure that things were going to go to heck in a hand basket over the geopolitical tensions in Crimea - forgot one thing. They simply forgot the way the "crisis play book" works.

The Crisis Play Book

One of the most important rules of engagement during a crisis is an oldie but a goodie: "Panic early or not at all!"

Crises in the market tend to be very emotional affairs. The indices "whoosh" lower when folks figure out that there could be a problem. Then fear becomes entrenched and everybody who wants to sell, does so (hence the idea that it is best to panic early).

Once things turn ugly, something eventually comes along to create a sigh of relief. This is called the dead-cat bounce phase. And then, after a retest of the lows, investors finally figure out that the sun will indeed come up tomorrow and those looking for bargains start to dig around in the rubble.

The bottom line is that stocks tend to rally when there is a reprieve, a sigh of relief, or, as was the case Tuesday, a de-escalation of a potential crisis. So, the blast higher on Tuesday appeared to be simply following the script.

The problem for investors in the near-term is that neither the crisis nor the armed conflict scripts may be in play here. As such, it is probably a good idea to avoid becoming married to any sort of macro view and to let price be your guide for a while.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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