Hurricane Harvey and the Need to Stay Protected – Introduction
The financial market is exciting. As I have mentioned before, no day is usually similar to another. The events of this weekend are wonderful illustrators of this. On Friday, the Hurricane Harvey started along the Texas coast. 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. Other industries likely to be affected are utilities like water, and roads. Other industries are consumer goods companies and transport-related industries. However, there are industries that will benefit. For example, infrastructure companies that will be tasked with building the destroyed homes and roads will benefit. Social media companies like Facebook and Twitter are also likely to benefit as more people check on them to find information.
As I 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, I have talked about the need for having a stop loss for all trades. I 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. 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.