The Dow Gets Complacent Again, but is the Russia-Ukraine Conflict Really Over?

The Dow soared after Crimea's referendum, but are Dow investors too quick to discount the threat of further conflict?

Mar 17, 2014 at 12:30PM

After the weekend's referendum on Crimea's rejoining Russia went much as expected, but without any huge escalation in the conflict, investors celebrated by sending the Dow Jones Industrials (DJINDICES:^DJI) up nearly 190 points, or 1.2%, as of 12:30 p.m. EDT. At the same time, the S&P 500 Volatility Index (VOLATILITYINDICES:^VIX), also known as the Fear Index, plunged more than 11%. Yet even though the fall in volatility represented a sigh of relief in avoiding immediate violent conflict, the big question is whether investors in the Dow and other stock indexes are being too optimistic about the eventual result of the situation.

Feeling the pain again


For those who invest directly in volatility, Monday's story has played out countless times. Following gains in anticipation of the key vote over the weekend, the iPath S&P VIX ST Futures ETN (NYSEMKT:VXX) gave back most of the ground it won late last week, with today's 4.5% drop erasing Friday's rise and about half of Thursday's gain as well. The VelocityShares Daily 2x VIX ST ETN (NASDAQ:TVIX) played out much the same way, with its double-leveraged strategy causing an almost 8% drop this morning.

The problem with volatility-based investments is that they're inherently short term in nature. Both the iPath and VelocityShares exchange-traded products focus on short-term futures contracts on volatility, meaning that they track investor sentiment about where the market is likely to head within the next month. By contrast, geopolitical events often take years to play out; so while specific key events might have a marked impact on the Fear Index from time to time, volatility measures won't always pick up gains in the longer-term perception of volatility.

Certainly, there's every indication that the situation in Ukraine is far from resolved. Even if Crimea peacefully becomes part of Russia, the next question is whether Russians in other areas of Ukraine will take similar measures to show their allegiance to their homeland. The resulting tensions could last for years, with the need for intervention from other areas of the world still a real possibility.

Being aware of the possibilities
Investors have to understand these longer-term ramifications in order to avoid getting caught up in short-term thinking. With the news cycle turning so rapidly, and with other hot spots such as China affecting your investments around the world, it's easy to forget entirely about a situation like the Russia-Ukraine conflict until the next escalation occurs.

The better choice for long-term investors, though, is to keep all these issues in the back of your mind. After all, other back-burner issues like the sovereign debt challenges of southern Europe haven't disappeared entirely, even though they've gotten a lot less volatile than they were a couple years ago. By remembering these events after they've fallen out of the headlines, you can do a lot to avoid getting blindsided by them the next time they make news

The best answer to volatility
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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