How you can trade the Hurricane Harvey?
Hurricane Harvey has been called the worst disasters in the United States since 2004. The Federal Emergency Management Agency (FEMA) has said that the recovery from the hurricane will take years. And it is easy to see why.
Roads have been submerged, Airports have been shut, products in retailers have been destroyed. Utilities like internet and water services companies have been destroyed. Companies have been closed as workers remain in the recue facilities.
As a trader, how do you trade in such a crisis?
Markets History can teach you
A good starting point is to look at history and how the markets reacted. After Hurricane Katrina, the stock market remained resilient with the S&P rising by about 3%. The NASDAQ and the Dow Jones Industrial Average also went up by a slight margin. The market did not fall as many had expected.
However, the market’s reaction after the 2001 terror attack was immediate. The markets fell as investors feared more attacks. There was also fear that the President of the United States would be a target during the crisis.
The two scenarios were different.
In the case of Hurricane Katrina, the areas that were affected were in Louisiana, a relatively small area that accounts for minimum trade. On the other hand, the terror attack in New York and Washington was severe because of the size of the two cities. There was also fear of more terror activities.
Another issue that is equally important is that there were forecasts of the hurricane. There was no forecast about the 911 terror attack.
Tips to Trade in Times of Uncertainty
To trade the Hurricane Harvey, first, you need to look at the so-called safe havens. One example of a safe haven is gold (here some strategies to trade it). When there are high risks, investors tend to move their money from risky assets like equities to bonds and gold which are usually safer.
→ The Best Safe Haven Assets to Own In Times of Uncertainty
After looking at the safe havens, you need to look at companies that will be impacted. To do this, you need to look at the geographical location of Texas and the industries that maintain the state.
As you will find out, Texas is one of the biggest oil and gas state in the country. It is home to many refineries and oil explorers. At this period, most of them have shut down operations. This will likely lead to lower revenues.
Therefore, as a trader, it will be wise to short the refiners and oil and gas companies that are in the state. You can also buy similar companies that are not in the state as their competition will be reduced.
Another way of trading in the crisis is looking at infrastructure companies. A lot of destruction has happened in the state. Roads, water services, and houses have been damaged. After the floods are cleared and people’s lives come to normal, they will likely reconstruct their houses and buy new furnishings.
Therefore, this creates opportunities for companies like Home Depot and infrastructure companies. It also creates a lot of opportunities for companies that sell home furnishings products.
With infrastructure damaged, it means that companies like Frontier Communications that provide internet fiber optic products will be affected. Their infrastructure products have been damaged which means they will be required to replace them.
The same is true to companies that supply water and waste management services.
The biggest casualties of all this will be insurance companies like Geico, Chubb, and AllState. These companies will be required to pay people who have been affected by the disaster. Therefore, in the immediate effect, it will be wise to short the companies.
While the disaster is bad and fatal, it will create opportunities for companies. Companies that are likely to benefit from the disaster are technology companies like Google and Facebook, as well as cable companies like Fox and 20 Century Fox as more people use them to follow up on the disaster. Companies like those that deal with cement and lumber will also benefit. Social media companies like Facebook and Twitter are also likely to benefit as more people check on them to find information.
The Need to Stay Protected (Update)
By the close of the market day, investors shrugged the fears about its impacts on the financial market. This is because investors are used to these events. The markets closed largely higher.
Then came the evening. The hurricane was so bad that it was later given a 4 classification. Then came the rains. As we saw on TV, the entire Texas area was flooded. It was so bad that most places were submerged.
As markets opened worldwide, it was clear that investors were wrong. The major indices were red as you can see below.
As you can see in the image above, the markets worldwide were in the red except the S&P 500 Vix index. A rise in this index is in fact a sign that the investors were pricing in more risks in the market. In other markets, the American WTI crude index fell as more refineries in the region were shut.
This was coupled with the implication that there would be less demand for the commodity. Brent, which moves directly with WTI rose, an indication of the seriousness of the flood issue.
Clearly, the biggest losers in this flood will be the insurance companies which will be required to pay the policy holders huge sums of money. There will be losses among the retailers who will be closed for business.
As we have mentioned before, this is what makes the financial markets business interesting: No days are usually the same. This calls for putting in measures to always stay protected no matter what happens.
In the past, We have talked about the need for having a stop loss for all trades. We have also written about the need to have small trades open all the time. Opening high-risk trades at such times can be disastrous for all traders.
However, such times also create huge opportunities for traders, especially those who are not in the market. As you already know, the financial market has surged after the election of president Trump.
This has made it very expensive to own different assets. Therefore, a correction like this helps investors and traders find cheaper items to buy. Being protected is the most important thing that any trader can do. It allows them to maximize their returns while reducing their exposure to huge risks.
Remember, there are other risks that can lead market lower. For example, a major news from a big company can have a major impact on the price of stocks (Here how to do news trading).
A good example happened last week when the largest advertising company, WPP, reduced its guidance. WPP is interconnected with other industries. For example, its biggest advertisers are the fast moving consumer goods like Unilever and P&G. Therefore, if the FCMGs are not doing well, the risks are also transferred to the retailers which market the goods.
When the retailers are not doing well, – which leads to store closures – the risk is transferred to the real estate companies that house them.
Therefore, as a trader, you should look at these events carefully and always ensure that your trades are protected.