This column was originally published on RealMoney on Aug. 30 at 11:32 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
"Hurricane Monday" gave traders their most volatile session since the London bombing in early July. Going into the morning, I started a diary to illustrate how I measured the risks and opportunities triggered by the event. This exercise will show you my thought processes when a quiet Monday gets turned upside down by bad news.
7:14 a.m. EDT:
I'm at my trading screen. Katrina is down in size overnight. My weather graphics show the eye headed straight toward New Orleans. Crude oil opened Sunday near $71 and dropped off to $70 immediately, It's now hovering about 50 cents below this "round number" as traders gauge the storm's impact to the supply chain.
The reversal at $70 says this is still major resistance and energy traders need real news to push it over the big number. The big problem is that no one can assess rig, pipeline or refinery damage until at least Tuesday, and it will take days for real damage numbers to be tallied. That means movement in the energy pits this Monday will be traders jockeying for position based on pure speculation.
I'm surprised the
Oil Service HOLDRs Trust
is trading up in the premarket. Some rig companies will see enough damage to undermine earnings for the rest of this year.
I have a list of 60 oil and gas companies on my screen. It will be instructive to watch variations in their performance at the open. In particular, which companies will benefit by providing repair services? I did some homework, but no repair operations stood out. So I'll wait and let the market separate the winners from the losers for me.
I have one hurricane play ready to go. It's the same one I kept ready during last year's hurricane barrage.
Crawford & Co.
is the only pure claims-adjusting play that I know about, but I'm reluctant to mention the name because it's so thinly traded. Having been in the insurance industry for 20 years, I know adjustors made a fortune after Hurricane Andrew, heading down to Florida and providing services for carriers. In fact, most carriers ran out of adjustors during that period and paid premium prices to anyone they could find.
I also have one big problem this morning. I bought
St. Paul's Travelers
( STA) on Friday afternoon because it had a pretty pattern. The insurance carriers will get hit this morning, and I'm going to lose money. My plan is to sell it on a gap down of less than a point, or hold it for a bounce if the gap is greater than a point. Will the plan save me money? I give it just 50-50 odds.
8:38 a.m. EDT:
Just grabbed a surprising premarket bid on St. Paul's Travelers at $44.25, down 50 cents from Friday's close. It looks like a bargain, but I'll see later if it was a good exit price. Here's one thing amazing me right now:
, with extensive Gulf operations, is bidding up over a buck even though it has shut down its local rigs.
9:08 a.m. EDT:
This is unbelievable.
, a classic pump-and-dump stock, is up 8% in the premarket. As I suggested in
Monday's column, I believe we're headed into an energy top/climax that will hold for the next two to four months.
Globex futures have bid off their lows as the eye wall passes to the east of New Orleans. It's a classic response to underestimate hurricane damage right at its peak, because local reporters play up conditions from their limited vantage points. I recall a Miami reporter during Andrew looking out his downtown window and declaring the storm was a dud because he couldn't see any damage.
9:19 a.m. EDT:
St. Paul's Travelers is now trading a point and a half below my exit price. Sometimes it pays to get up early in the morning.
9:44 a.m. EDT:
is showing the biggest jump (up almost 4%) of all the energy stocks I'm watching. That's makes sense. Globex futures are trying to fill the opening gap. This isn't the right time for a big reversal, so I'm looking for renewed selling pressure once the market shakes out the short-sellers.
9:57 a.m. EDT:
I've seen bid-ask spreads as high as 60 cents on oil service stocks that trade well over 2 million shares per day. The
specialists are taking full advantage of this morning's volatility. Oil service stocks now are coming down hard.
10:09 a.m. EDT:
I had a marketable order on my small-cap claims adjusting play for 8 minutes, but it wasn't filled. Can't find that one in the NYSE rulebook. I have five stocks in a long-term account, and it's my intention to leave those alone today, regardless of the price action. Past experience says not to sell when everyone else is selling.
10:29 a.m. EDT:
The Oil Services HOLDRs Trust is finally stabilizing, after dropping down to fill the opening gap. Picked up
and Halliburton for quick bounce trades.
10:37 a.m. EDT:
Stopped out of Apache for a small loss and exited Burlington Resources with a decent profit, all in 8 minutes. Meanwhile, the morning squeeze continues. The Globex futures are up but market breadth is negative in both exchanges. Apparently a lot of folks remember the upside reversal on the morning of July's first London bombings.
10:48 a.m. EDT:
Crude oil has stabilized around $68.50. Now I'm looking at
, which is a refinery in the Northeast with limited or no direct Gulf exposure.
11:26 a.m. EDT:
The churn continues. Market volume is still lower than average because we're headed toward Labor Day weekend. This makes the environment even more dangerous and unpredictable. Oil service stocks now reflect reality a lot better than when the session began. I'm still fishing a little in refineries and repair operations, and am holding Halliburton and Sunoco.
11:56 a.m. EDT:
Lunchtime in New York and the futures are wobbling around the unchanged level. It's a setup where neither side of the market gets paid. This may be a hovering pattern until crude oil decides where it wants to go today. My two energy stocks are showing a profit, but not enough to buy a Big Mac. It takes a lot of effort to turn an extremely volatile morning like today into a nonevent for all concerned.
12:33 p.m. EDT:
I sold Halliburton into its bounce for a quick profit but am still holding Sunoco and just added more shares. This has definitely turned into a daytrader's session.
1:27 p.m. EDT:
Oil is in full retreat and the equity short squeeze continues, but I'm not finding good long-side patterns. It appears most of the buying power is concentrated in the chips and the index futures, although market breadth is improving.
1:49 p.m. EDT:
So far, this day has been a lot of smoke and almost no fire for my trading account. Fortunately, the longer-term account is flashing green. In that account, I own
. It's nice to have some trades working on a confusing day.
2:26 p.m. EDT:
The crude oil pit is closing, the short-sellers are hurting and buyers are feeling a welcome sense of relief. I'll keep on playing both sides and wait to see how the market closes out the session. Just took a short on
Per Se Technologies
and long on
2:44 p.m. EDT:
Selling Sunoco into the spike here. Don't believe there's a lot more upside for refinery stocks today.
3:13 p.m. EDT:
Seeing last-hour strength. Taking advantage of it by buying
( GNSS) and
3:41 p.m. EDT:
The primary market theme today has been to deny weakhanded short-sellers after the hurricane. But that doesn't mean the full effect of the shock event is now reflected in stock or energy prices. The good news is that the major indices are pushing back toward their broken 50-day moving averages. Followthrough above those levels would signal the correction is over and we're headed into a test of the August highs. But I'm skeptical and concerned that Turnaround Tuesday will undo most or all of today's good vibes.
3:58 p.m. EDT:
It was a profitable day because the longer-term positions did well, but not most of the day's scalps and quick flips. Selling the Genesis Microchip spike but keeping the rest of my late buys and short sales overnight.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Crawford & Co., Ivanhoe Energy and Sigma Designs to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
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At the time of publication, Farley was long Sigma Designs, Apple Computer, L3 Communications, NRG Energy, Geron, Enersis and Global Industries, and short Per Se Technologies, although holdings can change at any time.
Alan Farley is a professional trader and author of
The Master Swing Trader
. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;
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