About 200 people dead and 800 injured in a train bombing in Mumbai late in the day on July 11 has grounded the Bombay Sensex index, which had been trading largely on speculation.

Traders would do well to study the Indian market following the crisis in Mumbai last week.

Typically, in situations of such magnitude, there is an immediate sell-off of modest proportions after some traders struggle to regain emotional control. Then the bulk of the reaction is bullish, as a sign of national support. What that is all about is an attempt to downplay the country risk factor. Finally, there is action following reaction, and that action is usually one of clear-headed analysis and decision-making.

If at the time of the "incident" the markets are generally over-bought, i.e., containing speculative froth, then the action taken by traders is usually to sell off high prices. That's what has been happening for three consecutive days in Mumbai.

But if the Bombay Sensex index had already been oversold, the subsequent action would likely have been strongly bullish.

So the point is that crises like the Mumbai train bombing, or say a U.S. presidential assassination or attempt, where trading continues without stop (unlike following 9/11), cause an immediate reversion to the mean, following which the amplitude of price cycles becomes smaller.

That's usually the time when PR people are sent back to the drawing board to reconfigure their stories.