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HOW TO PLAY IT: Preparing for the stock market to reopen after Sandy

NEW YORK, Oct 30 (Reuters) - As residents and businesses clean up from one of the worst storms to hit the U.S. East Coast in memory, investors are preparing for the stock market reaction by betting on or against insurers, casino companies and home improvement stores.

U.S. stock markets were closed Monday and Tuesday, the first time that weather caused a two-day market shutdown since the Great Blizzard of 1888.

While few analysts and strategists expect massive volatility when the market reopens Wednesday, there is likely to be some choppiness as the date coincides with the end of the fiscal year for many mutual funds. That could contribute to an additional wave of selling that day, fund managers said.

Due to tax rules, many funds have to sell any underperformers by the end of trading on Wednesday to avoid taxes on some of their portfolio gains. Eric Marshall, a mutual fund manager at Hodges Capital in Dallas, who co-manages five funds, said that his firm is moving all of the selling it planned to do Monday and Tuesday to Wednesday instead.

``This is going to drive volatility on top of what we're already expecting from the aftermath of the storm,'' he said.

There could be additional turmoil caused by the end of a lock-up for many employees of Facebook Inc, who can sell their shares on Wednesday. The lock-up expired on Monday.

Here are some of the strategies investors and analysts are turning to in preparation of the markets reopening.

SECTORS AFFECTED

Home improvement companies, insurers, casino companies and utilities will likely make strong moves at the market open, analysts said.

Gaming companies with casinos in flood-ravaged Atlantic City, where part of the city's historic boardwalk washed away, are among the most likely to be materially affected by the storm, said Tim Ralph, a money manager with Biltmore Capital in Princeton, New Jersey, responsible for approximately $600 million in assets under management.

``These big hotels haven't reported much property damage yet, but you have to expect that their gaming revenues will be down significantly,'' he said Tuesday afternoon.

Caesars Entertainment Corp, for instance, operates four casinos in the flood-ravaged city, while MGM Resorts International is behind the city's high-end Borgata casino.

Utilities like Verizon, Consolidated Edison and Comcast could also fall sharply because of the costs of clean-up and associated overtime, Ralph said.

The impact on insurers is also going to be scrutinized, said Marshall, the fund manager.

``It's hard to completely size up the magnitude of the damage,'' he said, particularly given the fact that it hit an area that represents roughly one-sixth of the U.S. population.

Joe Heider, a Cleveland-based wealth manager at Rehmann, a firm that has $2 billion under management, said the stock market will likely be volatile at the open Wednesday because of built-up order flow but then ease off by the afternoon. He expects that insurers will have the most significant losses.

Investors who want to take a bet against the sector could opt to short the $116 million SPDR S&P Insurance exchange-traded fund. The ETF, which costs 35 cents per $100 invested, holds 44 U.S. insurers. Its top holdings include Progressive Corp and Arch Capital.

Some fund managers expect any declines in the shares to create a buying opportunity because the losses from the storm should allow the insurers to raise prices.

``We have a laundry list of names that we think could open weaker and would be a great opportunity to buy,'' said Sandy Villere, a New Orleans-based fund manager at Villere and Co. ``Ultimately, this may offer (insurers) an opportunity to raise prices down the road and it could be a positive for the company. This event could have nothing to do with their profitability from an operating standpoint.''

One stock he's not going to bet on: Generac, which makes generators. ``I keep getting calls from clients to buy Generac, and I have to explain that (the company) has already rallied ... that play is already over.'' Shares of Generac rose 8.7 percent last week in anticipation of increased demand for generators because of the storm.

Home improvement companies like Home Depot and Lowes will likely have sharp moves higher at the open, Marshall noted, but those gains or losses will not be sustainable over the next two or three weeks, when investor attention will move back to the election and the possibility of big government spending cuts and tax rises early next year, he said.

The market will likely reopen as if it were the day after a long weekend, said Todd Salamone, director of research at Todd Salamone, director of research at Cincinnati-based Schaeffer's Investments. ``It's just going to be a question of what news will be digested,'' he said, including stimulus from the central bank in Japan and an improvement in the Case-Schiller housing index that came out Tuesday. The government's monthly unemployment report is also expected Friday.

Brian Gendreau, market strategist with Cetera Financial Group, said that markets tend to rebound to their previous levels within five days after natural disasters. The exception to that rule was the Japan tsunami.

``The U.S. is a very big economy, and while the magnitude of this storm could be in the billions it's actually very small in relation to GDP,'' he said.