Day Trading Options: Here’s how to trade a geopolitical shock

Tuesday, November 24, 2015

Here’s how to trade a geopolitical shock

vladimir putin reuters

On Tuesday morning, the Turkish military said that it shot down a Russian jet on the Turkish-Syrian border.

Turkey, a NATO member, claims that the Russian jet violated Turkish airspace. Russia denied this, and its president Vladimir Putin called the act a “stab in the back by the associates of terrorism.”

Shortly after the news broke, Turkish and Russian stocks fell. The Borsa Istanbul 100 Index dropped by as much as 4.4% (the most in five months), while the lira weakened by about 1% against the dollar. Meanwhile, Russia’s RTS Index retreated by roughly 4%.

Notably, this is actually quite typical of investor (or, more broadly, human) behavior. Geopolitical events tend to make traders and investors nervous, which then sometimes leads to volatility in financial markets.

But, as history has shown time and time again, these events generally do not have a sustained impact on markets.

Credit Suisse’s Head of Research and Deputy Global CIO Giles Keating and his team reviewed data back in June on major geopolitical events in the last 100-plus years and found that stocks generally bounced back up after these shocks.

“The large majority of individual major events — ranging from the assassination of Archduke Ferdinand 100 years ago through to 9/11 and recent events in Iraq and Ukraine — impact major stock markets by around 10% of less, with the effect being fully reversed within a month or so,” he wrote in a note to clients.

“This suggests that the most profitable strategy has usually been the contrarian one of buying into price falls caused by such incidents,” Keating wrote.

True, there have been a several times that markets didn’t recover as quickly after seismic geopolitical events such as the invasion of France in 1940 and the Yom Kippur War (which led to a complete realignment of control over global oil).

But even then stocks saw recoveries within 2-3 years, according to Credit Suisse.

Notably, Warren Buffett also champions the stay-calm-when-all-hell-goes-loose strategy. At the absolute height of the financial crisis, he wrote in a New York Times:

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

As an interesting side note, Napoleon — someone who literally changed the global geopolitical order — defined “military genius” as “a man who can do the average thing when all those around him are going crazy.”

As some have pointed out, the same can be said of investing.

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