More Explosions in Japan Have Increased Nuclear Risks

As of 11:30 p.m. EDT, S&P 500 futures are down 1.55%. According to a Bloomberg story:

Japan’s Prime Minister said the danger of further radiation leaks from a crippled nuclear power station is rising after three explosions and a fire at the site 135 miles north of Tokyo. Naoto Kan appealed for calm in a televised address, saying his government was doing its utmost to contain the radioactive leakage at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant following last week’s earthquake and tsunami. Blasts have occurred at three of the station’s six reactors since March 12 and a fire was discovered in a fourth unit’s building today.

From the Wall Street Journal:

TOKYO—Japan’s nuclear crisis showed signs of spinning out of control Tuesday, after officials reported a third explosion and warned of possible damage to a critical part of the cooling system at the troubled Fukushima Daiichi nuclear-power complex.

During the last week, we have been doing research on the market’s downside risk. We will present the results sometime in the coming days. The S&P 500 has good support near several levels; including 1,270, 1,256, and 1,225, which means we need to keep a level head and monitor the markets and situation with an open mind. Markets often find an intermediate bottom soon after the peak level of fear. We are not discounting the risks; we are simply stating the fact that investment decisions based primarily on fear often turn out to be poor decisions. A detailed look at the possible impact of upcoming Fed statements can be found in Will the Fed Hint at QE3 and Surprise the Bears?

Given the increasing risks in Japan and the significant drop in S&P 500 futures, we will amend our market strategy to the following:

  • We will continue to be patient with our cash until the news from Japan calms down a little and the technical picture in the U.S. improves.
  • Since we have been raising cash for a few weeks, if Tuesday’s session gives us some hope for an approaching intermediate bottom, we will hold our longs and see how the S&P 500 acts near key levels, including 1,275, 1,270, and 1,256.
  • If the S&P 500 finishes below 1,294 and/or 1,289 on Tuesday, we may consider raising some additional cash using the incremental approach. We may cut back further on energy (IEZ) should the bears continue to control the market.
  • If the market can find its footing soon, or near the levels above, we are willing to consider some redeployment of cash, possibly using a broad market approach (VTI or SCHB). A reversal near 1,270 or 1,256 would allow us to redeploy more cash than a reversal near 1,290 or 1,294.
  • Broad weakness may also have us consider reducing our exposure to technology (QQQQ).