Stocks surged to new record highs on Tuesday, with the Russell 2000 small-cap index enjoying its best run since October 2011, after a rambling and confrontational Russian President Vladimir Putin held his first press conference since the turmoil in Ukraine began.
Long story short: It looks like he lied.
He claimed Russian forces weren't occupying Crimea, despite reports that the well-armed, well-organized, Russian-speaking, masked soldiers without national insignia are, in fact, Russian troops driving vehicles still bearing Russian military license plates. He claimed that the overthrow of Ukraine's pro-Russian government in Kiev was illegal. He claimed vigilantes are roaming the streets and torturing the innocent.
He didn't mention that Russians have occupied and forced the surrender of Ukrainian military installations and are attempting to board blockaded Ukrainian warships. He didn't mention reports that these masked men are now identifying themselves as Russian.
But U.S. stocks blasted higher -- driven by the most shorted stocks in the Russell 2000 in a classic "short squeeze" event. Investors were hoping that Putin was trying to defuse the situation by saying he doesn't want to roll troops into the pro-Russian regions in eastern Ukraine as well. The bulls also focused on reports that scheduled Russian military exercises near the Ukrainian border were called off and troops ordered back to their bases.
Yet, they failed to consider that the exercises were due to end today anyway.
Stepping back, there was clear evidence of escalation.
For the first time, shots were fired into the air near the Belbek airbase as displaced and unarmed Ukrainian airmen marched toward Russian forced to negotiate a return to their posts. The Ukrainian Ministry of Defense is reporting that armed forces attempted to board and capture the Slavutych intelligence ship. The pro-Russian government in Crimea looks ready to push up the date of a popular referendum on breaking away from Ukraine proper.
And a Russian government official warned that any attempt by the West to impose economic sanctions could see an asymmetrical response, including the dumping of Moscow's U.S. Treasury bond and U.S. dollar holdings.
None of that mattered, as the currency pair that's been driving the market lately -- which I discussed in a recent post -- recovered from Monday's steep losses. I'm talking about the yen carry trade, which rebounded from a scary-looking breakdown to return to last week's highs.
So where do we go from here?
Much depends on whether Putin's comments really represented an attempt to cool the situation, or was he merely playing for time or to obfuscate the truth, not unlike his pro-Syria op-ed in The New York Times. My guess is the latter.
If so, today's rebound will ultimately prove to be a head fake ahead of further losses as the political situation in Ukraine worsens and sanctions are started.
For now, I continue to urge investors to maintain a cautious stance, resist the impulse to chase stocks higher here and look at booking profits in weaker positions and raising a little cash. If you want to hedge the risk of Russian and Ukrainian economic disturbances, consider the Teucrium Corn Trust (CORN), which is pushing higher on fears that grain exports out of Russia and Ukraine could be disrupted by the standoff.
I've added CORN to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended CORN to his clients.