The stock market bite
The final piece to the puzzle is the impact on the financial system from the New York Stock Exchange's longest weather-related closing since the Blizzard of 1888. Again, confidence plays a role here, because illiquidity risk -- the inability to buy and sell -- has a direct negative impact on the valuation of financial assets. This is especially true with Wall Street trying to prepare for major, and by nature unpredictable, political events: the presidential election and the fiscal cliff.
The New York Stock Exchange reopened trading today. That was critical, since it was the last trading day of the month, a time when institutional investors like hedge funds and mutual funds conduct "window dressing," which means buying and selling to clean up lists of holdings before statements are presented to clients. (You don't want them to see losers; think of it as erasing the bad grades from your report card.)
There will surely be fireworks ahead, especially with technical measures of market strength weakening so badly even before the weather-related break. Last Friday, the Nasdaq 100 Index ($NDX) dipped its toe below the critical 200-day moving average for the first time since December, as selling pressure intensified. Safe-haven inflows were pushing up Treasury bonds. And money was flowing out of key, economically-sensitive stocks, especially in the energy sector.
In Everybody's Magazine, Edwin Lefèvre, a financial journalist active in New York in the early 1900s, described the way illiquidity deepened the Panic of 1907. While this was obviously much worse than the NYSE's flood closure, from a market perspective, it reflects the same feeling of helplessness:
"(O)ne cloudy day somebody asked for a dollar, and, not getting it promptly enough, very promptly squealed. That squeal was the signal for the chorus to join -- the chorus of the entire world, which also wanted Money! Money!MONEY! It is sad to want money and not get it. But to ask for your own money and not get it is the civilized man's hell."
How to hang in there
For now, my advice to my readers (and my clients) remains the same: Stay defensive with large cash allocations, and use targeted short positions such as the ProShares UltraShort Oil & Gas (DUG) exchange-traded fund, and Treasury holdings such as the Direxion Daily 20+ Year Treasury Bull 3x (TMF) ETF, to try to find gains. Both positions will do well if the selling pressure intensifies, sending investors scrambling for the proverbial high ground of Treasury bonds.
I am also recommending outright short selling in some stocks -- including Hercules Offshore (HERO) -- to take advantage of any pull-downs in crude oil prices. (See current positions in my Edge Letter Sample Portfolio.)
If there is a silver lining from Hurricane Sandy, it's that academic research shows that natural disasters have a long-term positive effect on growth. That's because they encourage fresh investment and the adoption of new technologies, and they drive increases in productivity. If anything could use this, it's the New York City subway and transportation system.
So while the country and its greatest city will surely bounce back, there's first going to be turbulence for the economy and the markets. Investors will need to stay nimble and heed the warnings.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column. He has recommended ProShares UltraShort Oil & Gas and Direxion 20+ Year Treasury Bull 3X ETFs and shorting Hercules Offshore to his newsletter subscribers and money-management clients.
Meet Anthony Mirhaydari at the MoneyShow Las Vegas
MSN Money columnist Anthony Mirhaydari will be one of dozens of financial experts on hand at the MoneyShow Las Vegas, May 13-16, at Caesar's Palace in Las Vegas. And admission is free for MSN Money readers. Just click here to register, and click here to see what Mirhaydari plans to talk about.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
