Russia Risk and Psychology of War

Market participants are funny.  I am reading Russia takes from a lot of investors which doesn't make much sense.  A lot of people seem to think that Russia invasion of Ukraine is the biggest risk to the market, but they think that the risk is underpriced.  All people are talking about is Russia/Ukraine.   They are dominating the headlines.  And that's been the main reason we've had violent moves up and down over the last few days.  Its the main reason people have been buying puts.  Yet the Russia risk is underpriced?  

It gets back to the primal instincts of investors who are scared about war.  They equate human tragedy with stock market tragedy. 

Fed rate hikes seem trivial when compared to a war between Russia and Ukraine.  But Fed rate hikes are much more important to the stock market than war.  Its a much worse environment for stocks with a hawkish Fed and no war than a neutral Fed that can't hike aggressively with a war going on.  Investors tend to forget that this is a money game, not a news game.  Having bad news doesn't mean the stock market will be weak, and having good news doesn't mean the stock market will be strong.  But pumping a lot of money into the system usually means the stock market will go up.  And draining a lot of money from the system usually means the stock market will go down. 

Yet based on what I am seeing, investors are complacent about a hawkish Fed and think the Fed won't be able to hike much or meaningfully reduce their balance sheet but are scared that a Russia invasion would be a black swan.  Black swans don't happen when everyone is aware of it, with quite a few who are scared of it.  They happen when the event is either unknown or considered inconceivable.  

A lot of short term trading isn't about fundamentals but predicting whether a move is sustainable or unsustainable.  Fears based on war are not long term sustainable.  In the short term, the stock market can be inefficient and irrational, but in the long term, it finds its efficient, equilibrium level.  War doesn't hurt corporate earnings, in fact, it often helps corporate earnings for certain sectors (energy, materials, defense).  But you don't hear much about that, its just this instinctual fear about war that seeps into stock market.  

We have Fed minutes today, so I am sure that will get the nervous short term traders looking to sell or short ahead of the minutes release at 2:00 PM ET.  Stocks plunged on the last Fed minutes release in early January, so I'm sure not many are optimistic about what the Fed will have to say this time around.  Once we get past the Fed minutes, I don't see any more events that could be bear catalysts.  Except for World War 3!   

Got long SPX on Friday and Monday, looking for a bounce towards 4500 and higher by next week.  Lot of put volume in ETFs over the past few days, and investors seem to be leaning bearish and are getting more and more hedged.  I am just playing the range for now, don't expect any big moves in either direction.  If we can get back up to SPX 4550 and higher this month, I will consider a short position.