Panic Trading: Avoiding The Perils Of Hurricane Florence
Shain Vernier • 3 min read
The past week brought us a stark reminder of the role mother nature can play in everyday life. Hurricane Florence sent the southern Eastern Seaboard into chaos, forcing the evacuations of millions of residents. Traders monitored the situation closely, trying to gauge the potential devastation and market fallout.
Although Florence fizzled and made landfall as only a Category-1 hurricane, widespread flooding is expected throughout the southeast. Damage is estimated to be in the billions of dollars, with the aggregate economic impact likely greater. For those in the path of the storm, Florence is going to be a life-changing event.
As traders, what will the impact of Florence be upon the markets? Is there a viable trading strategy for situations such as these, or are we just along for the ride? Let’s take a look at a few issues surrounding Florence and how to keep your trading account safe from the fallout.
News Media Hype
Most of the time, I am highly critical of mainstream media outlets. Sensationalism and grandstanding in the name of ratings is the industry norm. In fact, it is debatable whether news outlets are comprised of journalists or entertainers. Nonetheless, disaster reporting is necessary, in that it may save lives. But, for active traders not in the path of pending catastrophe, the buzz can drain your account.
Last week’s media coverage of Hurricane Florence illustrates this point to a tee. On Tuesday, reports began circulating that a mammoth hurricane was building strength in the Atlantic. By Wednesday afternoon, news outlets began calling for Florence to slam the East Coast as a nearly-unprecedented Category-4 superstorm. Official evacuation orders were issued from state and federal government agencies to millions of residents. By Thursday evening, Florence made landfall as a Category-1 storm, not the juggernaut most of the talking heads on television told us was imminent.
Storms of this nature are wildly unpredictable, so accurately estimating their impact is a tough job. In that respect, I will give the misdiagnosis of Florence a pass. However, for those that bought into the hype and traded accordingly, it was an expensive lesson. Here is a quick recap of the Tuesday-Friday hurricane news cycle sessions:
- U.S. indices rallied for the week, led by gains in the DJIA and S&P 500
- Gold posted a nice rally on Wednesday, before selling off Thursday and Friday
- Agricultural commodity futures came in mixed, led by gains in meats and losses in corn/soybeans
In times of pending catastrophe, food and gold become hot items. Agricultural commodities tend to fare well, as does bullion. This week’s coverage of Florence illustrated this point. When reporting of coming doom reached a fever pitch on Wednesday, traders piled into December gold futures, running price north 75 ticks. Upon the storm underperforming expectations, prices crashed almost twice that amount. As reality set in, the market plummeted — smashing traders that bet Florence would live up to the hype.
Trading The Aftermath Of Hurricane Florence
At press time, torrential rains continue to batter the East coast. In some areas, there have already been over 30 inches of rain in the past 72 hours. This will contribute to a dangerous storm-surge, which is certain to cause unavoidable widespread damage.
For the coming week, here are a few items related to the coming storm surge that will impact the markets:
- Cattle and hog futures are likely to rise. There are a large number of slaughterhouses in the Carolinas and Southeast. If they go offline due to flood, meats will be in a position to rally and extend Friday’s gains.
- Media outlets are going to throw incredibly high cash estimates at the flooding damage. Assistance from the federal government will be pledged in short-order. Be on the lookout for U.S. 10-Year T-Note futures to rebound above 119’05’5, and regain much of what was lost over the last two sessions. As flood waters recede, initial estimates of the damage will be viewed as excessive. Just another case of media hype being debunked by the markets.
- Trading gold is going to be touchy. One sobering element of Florence is the proximity of nuclear reactors to the surge zone. There are nearly a dozen nuclear power plants in the path of Florence and the pending storm surge. The markets remember the fallout from Fukushima vividly — if nuclear security becomes a concern, gold will rally significantly.
When trading this week, keeping an eye on the media coverage surrounding Florence is going to be important. Flooding is likely to be intense and the nuclear question is a biggie. If we begin to see a bad situation unfold, then any number of scenarios can become reality in the markets. Stay tuned.
Disaster trading can be tough. Conditions change rapidly and the risk of full-blown market panic is very real. All we can do is keep our eyes and ears open, avoiding the temptation of trading rumor over fact. As always, patience will be the key to success.