Japan quake to keep stock investors wary

The growing devastation in Japan may accelerate the short-term negative sentiment in a US equity market already seen as vulnerable, but ongoing weakness is likely to be confined to specific sectors.

The massive earthquake and tsunami in Japan are estimated to have killed 10,000 people and left officials scrambling to avoid meltdowns at three nuclear reactors.

The disaster hit commodities markets hard on Friday, and brought on a flurry of short bets against Japanese stocks.

The effects on the US market are harder to determine.

The S&P 500 fell below its 50-day moving average last week and support appears to be waning, despite a rally on Friday.

In the short term, investors are likely to focus on the ramifications for energy companies, particularly nuclear power.

Japanese officials said there may have been a partial meltdown at the No. 1 reactor of a nuclear plant in Fukushima.

"The disaster could prove to be a setback for nuclear power as an alternative energy source," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "Whether or not we see a reaction in utilities and engineering and construction companies remains to be seen."

Ablin, however, did not foresee a notable reaction in the broader US market.

Nuclear-powered countries may re-examine expansion efforts or expend more on safety and security at plants. President Barack Obama has been a supporter of an expanded nuclear energy program, but that will be called into question now.

In February, the White House asked for USD 36 billion in federal loan guarantees to help finance the building of nuclear power plants, as it did last year, which would double what the loan program already has in authority.

"Nuclear loses in the near term. Conventional oil, natural gas, and coal are the winners," David Kotok, chief investment officer at Cumberland Advisors in Sarasota, Florida, wrote in a Sunday commentary.

Nuclear energy stocks have received a boost following yearly budget proposals from President Obama. The Van Eck

Market Vectors Nuclear Energy exchange-traded fund hit a 52-week high on February 8, rising 7% in the two weeks after Obama's 2011 State of the Union address.

The quake triggered an increase in risk aversion, with nervous Japanese liquidating investments overseas and bringing capital back to yen-denominated assets.

The dollar fell 1.2% to 81.87 yen on Friday, while shares of the CurrencyShares Japanese Yen Trust rose 1.3% to USD 120.62. The yen may come under pressure, however, if the reconstruction worsens the country's already-heavy debt burden.

Oil, middle east still weigh

Investors are also still grappling with political protests in the world's top oil exporter, Saudi Arabia.

The market's recent weakness revived talk a correction is near, analysts said, even though stocks recovered from early losses on Friday to finish the day higher with the Dow back above 12,000 and the S&P 500 above 1,300.

Stocks have rallied sharply since the start of September, with the S&P 500 up 24 percent for that period, but faltered in the last two weeks. At Friday's close, the Standard & Poor's 500 Index was down 1.3% for the week.

"Oil prices were already moving higher before unrest in the Mideast, and if we do have something that is pronounced in

Saudi Arabia -- and I don't think that's a high probability -- but if we do, the cards are off the table as far as where prices could go," said Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas.

"The impact from that is, I think you've got a chance for another recession."

Protests in Saudi Arabia were more muted than some had anticipated on Friday. Concerns arose that planned "Day of Rage" protests in the country could lead to further instability in the Middle East and North Africa.

Inflation and the Fed

The jump in crude oil prices to 2-1/2-year highs has raised anxiety about their dampening effect on the economy.

Given those concerns, investors will be tuned into any comments on energy from the Federal Reserve when it releases a statement on Tuesday afternoon following its policy meeting.

The U.S. central bank is unlikely to hint at policy changes this week, and is expected to keep interest rates near zero.

For the week, the Dow Jones industrial average fell 1%, the S&P 500 slid 1.3% and the Nasdaq lost 2.5%.

Besides a break below the 50-day moving average earlier this week, the S&P 500 fell below a long-standing trendline, suggesting the benchmark index has lost momentum and that the recent rally may be losing steam.

"That behaviour tells you demand has weakened, which puts odds on further downside in the near term," said Chris Burba, short-term market technician at Standard & Poor's in New York.

If the S&P 500 falls below 1,275, the next support area is 1,227 to 1,177, he said.