02/01/2011 02:49 pm ET Updated May 25, 2011

Wall Street Blind to Egyptian Crisis?

"It was like avoiding an atom bomb, or in this case, a financial bomb," quipped one Morgan Stanley trader.

That was his reaction to Monday's surprisingly strong stock market performance following Friday's wicked 166-point decline in the Dow in the wake of the Egyptian riots.

The consensus of some market watchers over the weekend was that all hell might break loose on Monday, but it never happened. The market opened higher, never looked backed and wound up the day higher, with the Dow rising more than 68 points.

Even the Wall Street Journal guessed wrong, telling its readers over the weekend that U.S. stocks were likely to extend their Friday tumble when the market opened Monday. Actually, when you think about it, the Journal should have been right, given the obvious risks related to the riots, any of which could play havoc with stock prices. Most notable::

-- The riots might encourage terrorists to spread the them in an effort to destabilize other Mideast regimes, such as Jordan and Saudi Arabia.

--The riots could lead to a possible disruption in the transportation of 2 percent of the world's oil through the Egyptian-controlled Suez Canal, which would cause the price of crude to skyrocket.

-- More than likely, the riots might heighten tensions between Israel and its neighbors should Egyptian president Hosni Mubarak (who announced he will not seek re-election) leave and radical elements take control of the country, the leading Arab peacemaker in the region.

Apparently, investors pooh-poohed the significance of these risks. Though investors escaped the ravages of the riots on Monday, the question is raised as to whether Wall Street is making a mistake by downplaying the crisis. Some market watchers suggest yes.

One is well-regarded Wall Street veteran, Fred Dickson, chief investment strategist of D.A. Davidson & Co. in Great Falls, Montana, who argues the worst may not be over yet as far as the Egyptian conflict goes. It will prey on investors' minds until stability is restored, he says. "It's like a flash fire; either it goes out right away or it smolders. This one will smolder."

Dickson figures the Egyptian situation will lead to above average market volatility for the next month or so. One obvious danger, he notes, is the possibility that extremist elements may gain control of the country. If that happens, he observes, "look for a nasty market decline."

In any event, Davidson sees stock prices vulnerable to a 3 percent to 5 percent pullback some time soon. "This market has come awfully far awfully fast and looks overextended," he says.

Another market watcher also questions the wisdom of downplaying the crisis. He's Costa Rican money manager Felix Heligmann, who manages about $93 million of family and friends' assets.

About a week ago with the Dow hovering around 12,000, up about 20 percent since late August, he told me "The U.S. market is acting so strong that you really have to be a player and I'm going to increase my position."

But that was a week ago. Now, in light of the riots in Egypt, he's had a change of heart. "I've changed my mind about doing more buying," Heligmann says. "The market is acting like the events in Egypt were a non-event. That's reckless, scary and it's also not right because too many things there could go wrong. Does anyone," he asks, "really think the U.S. haters in the Mideast are not plotting ways to worsen this crisis?"

Whether he's right or wrong is anybody's guess. But for sure, he's dead on about the market, which, based on its ongoing strength, looks like a combination of Samson, Hercules and Conan the Barbarian all wrapped up into one.

Citigroup views the political unrest in Egypt as little more than "a short-term challenge." In addition, a Rasmussen poll shows that 75 percent of the participants don't think the Egyptian problems will spread.

I only wish I could be so cocksure. Reminds me of this boat captain who assured an alarmed passenger: "Don't worry; the Titanic could never sink."

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