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As Hurricane Sandy bears down on the northeastern United States, investors and traders have every reason to be nervous. Recent reports say that the storm may be unlike anything ever experienced by the northeast, and may cause hundreds of millions, or even billions of dollars in damages. A major disaster (think Hurricane Katrina) has the potential to cause the entire market to take a dive.

Even if the storm is not as bad as it "could" be, there are several sectors that will be affected, and the degree to which they are affected will have to do with the level of damage caused. Investors need to know the best ways to protect themselves, should things go badly early this week.

Possibly the sector to keep the closest eye on is insurance companies, such as Hartford (NYSE:HIG), Travelers (NYSE:TRV), and Chubb (NYSE:CB). Travelers, for example, derives 18% of its income from homeowner policies. If the winds stay as strong as they are forecast to, these companies will have a great deal of expenses in the upcoming months, and this could have an adverse effect on stock prices.

For those who don't know how insurance works when it comes to storms, here is a brief summary. I happen to live in the Florida Keys, where if anything we are over prepared for storms. The biggest potential issue with this (or any) storm is flooding, and right now there is a forecast of a 4-8 foot storm surge for most of the New Jersey and New York coasts. What a lot of investors and homeowners don't realize is that a homeowner's policy does not cover flood damage, nor does it cover most damage from winds associated with a named tropical storm. On my own house, I have to have three separate policies; homeowner's, windstorm, and flood, in order to cover all potential tropical storm damage. The way my insurance agent described it to me was that flood insurance covers anything damaged by water that enters the house and that windstorm insurance covers any damage that occurs when an entry barrier to the house (door, window, or roof) is damaged or blows away. Homeowner's covers all damage other than that. This does not add up well for residents of New Jersey and New York, especially those residents that reside inland, and have never had to worry about this before.

This brings me to the other sector that is likely to be affected, however in a positive way: home improvement companies. Other than the obvious home improvement giants, like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), which would benefit enormously from flood damage that needed to be repaired, there are smaller niche companies that may benefit much more. Any South Floridian knows that the main concern with wind damage has to do with roofing. Where I live, roofs are built to withstand 150 mph winds, however in non-tropical and non-coastal settings, this is not the case. When building houses 50 miles inland in New Jersey, hurricanes were the furthest thing from the minds of the builders. And, as anyone who has had to pay out of pocket to replace a roof can tell you, it's not cheap. The best plays on a surge of roofing repair are Owens Corning (NYSE:OC) and Beacon Roofing Supply (NASDAQ:BECN), both of whom could provide great insurance to investors should the storm be worse than expected and the overall market declines in response.

Source: Hurricane Sandy's Potential Impacts