As you can probably imagine, it’s been a slow day here at Schaeffer’s. With every major market closed and no end in sight, the logical next step to take as a trader is to evaluate how you can capitalize and/or insulate yourself from any lingering effects of Hurricane Sandy. Morally speaking, I take issue with shorting markets because of natural disasters or other multi-sigma events, in hopes of making a profit. Rather, I’d look to capitalize on markets that have priced in “too much” information and overshot to the downside.
The news of Hurricane Sandy hitting, at this point, isn’t exactly news. Much of what we’re seeing on TV right now was rumored early last week, and the rumor turned into more of a certain event by the end of the week. My point here is that markets are forward looking, and if you’re thinking about shorting something now because of the effects of the hurricane, chances are you’re late to the party. S&P 500 futures were down at their lows at about 7:00 this morning, but this selloff was met with strong buying into the closure of the CME at 9:15, and the SPUs closed down only 4.75 points from Friday’s closing print. If this hurricane and its severity was new news, surely markets would’ve been hit much harder.
There are a few obvious sectors that will have to absorb the negative impacts of Hurricane Sandy. At the forefront, you would have to think airlines, refiners, utility companies, and insurance companies will feel the most pain from what is transpiring on the eastern seaboard. I took a look at all of these sectors today, and in my opinion, insurance companies could be setting up the best of these four groups. Within this sector, I like Travelers Companies (TRV) and Allstate Corp. (ALL) the best…
Travelers Companies – the stock is in a very nice uptrend and has outperformed the broad market this year, up 21% year-to-date. TRV reported blowout earnings on 10/18, and the stock gapped up sharply. Since then, it has consolidated and filled that up gap, potentially a result of the hurricane news hitting the wires last week. Short interest, currently 7.7 million shares, is near its highest level seen in 2012, so continued skepticism toward the equity could be a bullish sign.
Allstate Corp – Another nice trender, up an impressive 46 percent year-to-date. Price action last week is pretty indicative of hurricane worries, but the 50-day moving average has been a good guide for ALL for most of the year. While there could be some gyration around this trendline for a few days, buying on weakness could make sense.
Markets are set to be closed on Tuesday, and many are speculating that opening Wednesday is now in doubt. That said, there will surely be “opportunists” looking to short these names to make a profit, but in my opinion these bears will be late to the party. When equity markets do finally open, look for these names to gap lower, and any show of strength could be bought as these new shorts could be trapped.