How Will Hurricane Sandy Affect Stocks and the U.S. Economy?

Hurricane Sandy has shut down the New York Stock Exchange. The last time a natural catastrophe forced Wall Street to go into hibernation was Hurricane Gloria in 1985.

Even though trading at the NYSE has halted, investors never stop looking for the next opportunity. What sectors will be most affected by this or any other hurricane and are there any profit opportunities?

Insurance Sector

It’s yet to be seen what kind of damage Sandy will cause. According to the National Oceanic and Atmospheric Administration (noaa.gov), Katrina was the most expensive hurricane with damages of $145 billion.

Someone has to pay for that damage and insurance companies (that’s what we have insurance for) will end up paying a fair share of the repairs.

Property and Casualty Insurance companies collected about $471 billion worth of premium in 2010. According to a report by the Congressional Research Service, done right after hurricane Katrina devastated New Orleans. The net profit earned on the $471 billion worth of premium should be about $40 billion.

The same report states that: “Most insurance experts would agree that the $100 billion-plus catastrophic event remains a challenge for the U.S. property and casualty insurance industry.”

A common sense approach to investing suggests to stay away from the insurance sector and ETFs like the SPDR S&P Insurance ETF. Of course, the ultimate cost of any disaster will be passed on to policyholders via increased insurance premiums.

Energy Sector

The New Jersey coast is home to more than six large refineries and has a refining capacity of 1.2 million barrels per day. As of Monday, two thirds of the refineries were shut down.

New Jersey refineries account for about 7% of total refining capacity in the U.S. In comparison, the gulf coast accounts for 45% of U.S. refining capacity.

The decreased energy demand of the densely populated East Coast caused by hurricane Sandy could be about the same or more than the loss of refining capacity. This means rising oil and gasoline prices nationwide are far from guaranteed.

In fact, immediately following hurricane Katrina, oil prices dropped a stunning 21%. Hurricanes are not an automatic buy signal for ETFs like the Energy Select Sector SPDR (XLE), S&P Oil & Gas Exploration & Production SPDR (XOP) and others.

Home Construction Sector

Home improvement stores like Home Depot and Lowe’s should attract a big chunk of the disaster prevention and disaster repair dollars spent. The iShares Dow Jones US Home Construction ETF (ITB) has an 8.7% exposure to Home Depot and Lowe’s.

Retail Sector

Will money spent at Home Depot and Lowe’s cannibalize the holiday spending budget? Retailers like Macy’s, Kohls, Gap, Nordstrom, Tiffany, Amazon, Best Buy – all part of the S&P Retail SPDR ETF (XRT) – could suffer from Sandy.

Hurricanes and the Stock Market

What’s the effect of hurricanes on stocks? The chart below shows all major U.S. hurricanes (since the year 2000) in correlation to the S&P 500 Index.

Allison in June 2000 came amidst the tech bubble deflation. Charly, Frances, Ivan, Katrina, Rita, and Wilma didn’t make a dent in the 2002 – 2007 market rally.

Gustav and Ike happened right before the financial sector unraveled in 2008 and Irene landed on shore at a time when we expected a major market bottom.

The August – October timeframe happens to be a tumultuous one for nature and stocks and recent hurricanes coincided with stock market inflection points.

This could be the case again with Sandy. Last week’s Profit Radar Report pointed out that the S&P 500, Dow Jones Industrials, MidCap 400 Index, and Russell 2000 are all above key technical support.

Like a stretched rubber band they should snap back, but if the don’t they’ll break. As such, the next opportunity will likely be triggered by technical developments not hurricane Sandy. The Profit Radar Report will provide continuous updates and trigger levels for the “stretched rubber band” condition.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Groundbreaking Study – Dividend ETFs are Riskier than the S&P 500 Index

Dividend rich sectors and dividend ETFs are often considered boring and anti-sexy. However, a closer look at past performance shows a surprising twist. The “orphans and widows” deliver more pizzazz and less safety than you’d expect.Investors are scrambling for two things right now: Safety and income.

Safety

Courtesy of the 2008 meltdown stocks lost about 50% and even the persistent stock market rally from the March 2009 low is marred by three corrections of 10 – 20%. Such drops aren’t easy to stomach and retail investors are simply scared of volatility.

Income

The Federal Reserve has publicly stated its objective of keeping interest rates low until 2015 and beyond. This is great for banks and corporations, but investors (especially retirees) are left without income.

The need for income draws many to dividend ETFs. The common perception is that dividend ETFs provide safety and income, but is that really true? Let’s look at the facts.

Dividend ETFs

We will use the iShares Dow Jones Select Dividend ETF (DVY), SPDR S&P Dividend ETF (SDY), and Vanguard Value ETF (VTV) as proxy for dividend ETFs. The current dividend yields are: 3.41% for DVY, 3.14% for SDY, and 2.61% for VTV.

DVY, SDY, and VTV reached their all-time high on May 23, 2007. How did DVY, SDY and VTV handle the 2007 – 2009 stock market crash compared to the S&P 500?

From May 23, 2007 – March 06, 2009 the S&P 500 lost 55.11%. Surely, dividend ETFs should have fared much better, right? Wrong! DVY lost 63.01%, VTV lost 58.59% and SDY slightly “outperformed” the S&P with a loss of “only” 54.83% (see chart below).

Financial Sector – For Better and for Worse

One reason dividend ETFs got slammed by the market crash is their objective of finding dividend paying stocks. The financial sector paid the highest dividends in 2007, 2008, and early 2009.

Financial stocks got hit harder than the broad market. Being focused on dividends during this time was like maxing out your credit card just to earn miles. The cost (or risk) simply wasn’t worth the benefit (or dividend).

Nevertheless, the exposure to financial stocks helped dividend ETFs to a quick recovery in 2009. Although dividend ETFs did a lousy job of preserving their owners capital during the meltdown, they’ve outperformed the S&P 500 Index ever since.

Sector Rotation

From the March 2009 low to the September 14, 2012 high, the S&P 500 was up 114%, DVY gained a stunning 152%, SDY 143%, and VTV 128% (see chart below).

DVY and SDY also did better during the summer 2011 meltdown. Where the S&P 500 lost as much as 21.58%, DVY’s maximum loss was 17.78% and SDY dropped not more than 17.90%. VTV on the other hand fell a whopping 24.30%.

We don’t know the ETF’s top holdings in 2011, but today VTV is the only ETF that still counts financials as its top sector. This probably contributed to the disappointing performance in 2011 (financials lost as much as 36.33% in 2011).

SDY has a 21% stake in consumer staples, which paid off as the SPDR Consumer Staples ETF (XLP) now trades over 20% above its 2007 high. DVY has a 31% stake in utilities and 18% exposure to consumer goods.

Lessons Learned

Who would have thought that dividend ETFs outperform the S&P in an up market and under perform in a down market? Dividend ETFs aren’t bad investment options, but they may not do what “they’re supposed to do.”

Chasing dividend yield rich sectors bears risks, and if you own dividend ETFs solely as a protection against the next sell off, you may want to rethink your strategy.

Week Ahead for the S&P 500 – QE3 vs. Worst Week of the Year

Last Friday was triple witching and the week after triple witching is notoriously bearish. How bearish? The S&P 500 Index has closed down 22 out of 26 weeks since 1990 (82%) with average maximum losses about 5x as high as average maximum gains.

Historically short sellers of stocks have an 82% chance of making money this week. However, the S&P 500 Index failed to registered a bearish price/RSI divergence at its September 14 recover high.

All recent highs that were followed by a decline of around 10% or more were foreshadowed by a bearish RSI divergence (I use a unique RSI setting to spot divergences – see chart below). So even a bearish outcome this week would likely be followed by higher prices later on.

The purpose of the Profit Radar Report is to identify high probability trading opportunities. With the conflict between bullish technicals and bearish seasonality, there obviously is no high probability set up right now.

One of two things will have to happen to create a better set up:

1)   Prices decline to trend line support to present a possible buying opportunity.

2)   Prices spike quickly to a new high accompanied by a bearish price/RSI divergence to set up a possible shorting opportunity.

Non-leveraged ETFs that can be used to trade the above set up are the S&P 500 SPDR (SPY) and Short S&P 500 ProShares (SH).  Leveraged options include the Ultra S&P 500 ProShares (SSO) and UltraShort S&P 500 ProShares (SDS).

An early tip off to the next developing set up may be a developing triangle. A break out above or below triangle support/resistance should give us a measured target, which may quite possibly set up an even better opportunity than the actual triangle.

Continuous updates and trading opportunities are provided via the Profit Radar Report.

QE3, Apple, and Rekindled Love for Stocks – How to Use Technicals to Navigate a Confusing Stock Market

This week is jam-packed with news. Apple, Bernanke, and Germany’s Constitutional Court are slated to make potentially market-moving announcements. Here’s one simple technical tip that will help navigate a confusing situation.

What does Apple’s Tim Cook, the Fed chairman Ben Bernanke, and Germany’s Constitutional Court have in common? They are all expected to announce much anticipated news this week.

Wednesday, September 12. Apple

Apple is putting the finishing touches on the Yerba Buena Center for the Arts in San Francisco. That’s where a select few will (or are expected to) lay eyes on the new iPhone 5.

Apple shares (AAPL) didn’t quite reflect fans’ excitement as shares dropped 2.6% on Monday.

This drop triggered a bullish percentR low-risk entry against the 20-day SMA. Just because this is called a “bullish” low-risk entry doesn’t mean it’s time to buy.

Apple shares tend to move higher when new products are revealed and correct thereafter (with the exception of the April 2012 iPad 2 unveiling, which coincided with a larger drop, instead of a rally).

A rally parallel to Apple’s event would likely provide a good set up to sell AAPL shares. A drop below the percentR trigger level will also suffice if we don’t see the customary Apple release spike.

Short selling a stock is not for everyone. But Apple accounts for 20% of the Nasdaq-100 index (corresponding ETF: PowerShares QQQ) and shorting the Nasdaq-100 via short ETFs like the Short QQQ ProShares (PSQ) is a more accessible way to benefit from falling Apple prices.

Wednesday, September 12. German Constitutional Court Ruling

The European Stability Mechanism (ESM) is the facility anointed to distribute European “bailout cash” to struggling euro zone members.

The ESM has many flaws (one of them is lack of funding) and one of them may prevent its VIP from playing “money ball.” The German Constitutional Court will rule over the legality of participating in the ESM on Wednesday.

Thursday, September 13. FOMC and QE3?

The Federal Open Market Committee (FOMC) will meet Wednesday/Thursday this week.

The S&P 500 Index (SPY) is points away from a 55-month high and I don’t think that launching QE3 right now makes sense, but I don’t know what’s going on behind closed FOMC doors and the general consensus is that the Federal Reserve will announce QE3 on Thursday.

Similar announcements have resulted in large moves for stocks, Treasuries, currencies, gold and silver.

Combat Uncertainty with Technicals

What does the S&P 500 chart tell us about stocks? If the chart could talk it’d say that now is “rubber meet the road” time.

The S&P is close to key resistance at 1,440 (this month’s r1 is at 1,437) which the Profit Radar Report has been harping about. 1,440 is the most important resistance in the neighborhood. It separates bullish bets from bearish ones and provides directionally neutral low-risk trade opportunities (my bias is to the down side, which may require waiting for a spike above 1,440 followed by a move below).

Various news events suggest that this week is important. Technicals agree. Use important support/resistance levels to put the odds in your favor.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.