Hope you're having a better week so far than many of our friends, neighbors and colleagues to the Northeast. Our hearts and prayers go out to all of those feeling the negative impact of Hurricane Sandy's ruthless behavior over the last few days. Mother Nature has a way of bringing everyone together though, so it's nice to see the rest of America supporting our fellow brothers and sisters in time of need. I'm sure we'll start hearing more and more about all of the individual heroic efforts and selfless acts of kindness that not only took place in the face of Hurricane Sandy, but also with the rebuilding and repair efforts that are going to take place in the weeks and months ahead. If you're wondering if you missed anything yesterday, we didn't publish a newsletter edition for obvious reasons, however, we thought we'd provide our two cents on how this market is going to react to all of this, as well as how it's going to affect certain sectors, both in the short and long run. There's three things most important to remember assuming the markets open for trading tomorrow, or whenever they do open. First, let's remember the markets are extremely efficient, so let that be the first premise for today's edition. If you've been around the markets for a good while, then you know natural disasters, unforeseen circumstances, significant isolated events and corporate hiccups are all a part of the market's everyday life. The key to being opportunistic though, is to know first that the markets are much more efficient than most investors are ever going to give them credit for, unless we're referring to the mortgage credit debacle of a few years ago of course. Yes, I had to throw that in there. Additionally, you're investing strategy should play a large role in your decision making process. Are you a short-term swing trader, or a long-term investor building on your retirement? These are extremely important questions you not only need to ask yourself in times like this, but questions you should be answering regardless of what's going on out there. Knowing and understanding who you are as an investor and what your goals are is half the battle. And lastly, as for as the macro view of the markets, I think the major indexes are going to pretty much dissect and determine very early on in the first few hours of trading, the short-term repercussions of what has taken place. In other words, whatever the smartest economists decide the economic impact of Hurricane Sandy is going to have on us in the short-term is going to be priced into the markets very early on. With that being said, here’s what we think. The major indexes over the last few weeks have been gravitating toward certain levels. I’ll use a daily chart of the S&P 500 here as a perfect example. The complete 3/8 retracement of its whole move that started in June currently sits at roughly 1395. It appears inevitable that the index is going to test that August support level displayed by the 3/8 retracement (horizontal red line). A test and hold, or even a break below would suggest an excellent possibility the index may be ready for a bounce. Contrary to what many may think, whether it holds or breaks that level is not what’s important to us. The fact that it gets there is what we’re predicating a potential short-term rally on. Once it can get to that level, which is only 21 points or so away from Friday’s close, I think the risk reward to get long is pretty good. The DOW is already there, the NDX is almost at its 5/8 retracement level, while the NASDAQ Composite sits at a 50% retracement. If you’re wondering why the two NASDAQ indexes have blown off more steam than that of the S&P or DOW, it’s simply because it ran much higher on a pure percentage basis over the last few years than their more conservative counterparts. So, if the markets gap down tomorrow and trade down to that level on the S&P, and there appears to be signs of volume and strength holding, we could be in store for a very nice relief rally at the very least. If the markets gap up for some odd reason, I'd be patient and see how the day and the next few days after start to play out. Many are likely expecting to see the markets react heavily to what has happen, I suspect it won't. The long-term implications of Hurricane Sandy should be good for the economy. Yes, we're going to add to our existing deficit, but does it really matter at this point? The deficit damage is still going to be there, Hurricane or no Hurricane. I suspect there will be spurred economic growth that will help stimulate the economy in the Northeast for a good while to come. If you're think about buying names like Home Depot (HD) or Lowe's (LOW) due to an increase in consumer building and contractor purchasing, you might want to see the second premise above regarding your investing strategy. For short-term traders, there may exist some upside there, but I'm going to bet dollars to donuts this becomes a very crowded trade to the long side with market makers probably gapping up those stocks in an effort to take advantage of stupid money. Yes, they may run for a day or two, even a week, but when the dust settles, I suspect they will be overpriced due to irrational exuberance from the bulls. Playing contrarian here may prove much more prudent by waiting until the hysteria wears off, then get short some put options. They should come back to earth because the long-term prospects of these companies are far more important than one outstanding quarter they may experience due to the Hurricane. Conversely, if you're thinking of dumping those oil stocks, refineries, distribution and any other companies, which will likely see a negative effect from the slowdown in demand and/or the ability for them to produce and distribute, you're probably going to see some real bargains if you're strategy is long-term in thinking. I suspect looking for value in short-term beaten down stocks may be the better approach than trying to capitalize on companies, which stand to benefit from the Hurricane. Why? Stocks that stand to benefit will likely be immediately overpriced, while stocks that are subject to weakness, due to the Hurricane, will likely be overly discounted to the downside, especially in the short-term. Whatever you decide, waiting until things settle may end up providing you with excellent long-term entries into some of those ideas. Insurance, as well as consumer discretionary names may also not be a bad place to look if you're looking for long-term holdings, which may experience some short-term downside in the coming weeks or even months ahead, so use a contrarian approach and look for logical levels of support in your charts before deciding to jump in and act. The reality is this market is likely not going to be affected much by what has happened. If you go back to the 9/11 terrorist attacks, the markets were much higher two years later. I'm not comparing the two events at all other than pointing out that the markets are very quick to appropriately price in unforeseen events like this. As a matter of fact, they tend to slightly overreact initially, but that's in large part due to investors overreacting right out of the gates. The bottom line is this... although we never want to see things like Hurricane Sandy or Katrina do what they've done, the economic impact of these events usually end up making things better and stronger down the road. Let's hope in this case, things are no different and casualties remain low, because at the end of the day, nothing is more important than the health and safety of our fellow Americans.