We know the playbook: buy gold, buy stocks, buy commodities. But now we know exactly which ones to buy. Good luck and good trading.
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The recent mantra to Fed action was buy gold as a hedge against the dollar, but with the gold (NYSE: GLD) being the second-most crowded trade to (NASDAQ: AAPL), what are other alternatives? (Note: that's not an actual statistic, just an observation). There are many different views on the best hedges to the Fed, but let's see what the data has to say.
Gold obviously is the winner, having nearly doubled from the 2008 lows through the end of QE2 and increasing another 14% during QE2. Miners have not performed as well, though small and mid cap miners (NYSE: GDXJ) have outperformed their larger cap (NYSE: GDX) brethren. Silver (NYSE: SLV) has lagged its yellow cousin, as it actually has industrial value. Really, only Apple has outperformed gold since the Fed has attempted to save the world.
Another obvious trade is to short the dollar (NYSE: UUP), especially as the dollar has been strong recently. However, the dollar was stronger ahead of both of the quantitative easing programs, with the dollar index trading well north of 85 prior to each. The high so far has only been just over 83. The sell-offs following balance sheet expansion by the Fed have ended around 75, meaning that traders could pick up about 12% by shorting the dollar (NYSE: UDN).
Shorting bonds have been the loser in all of this, with treasury bonds (NYSE: TLT) continuing to fall to record low yields. Being short bonds (NYSE: TBT) has been a losing trade, with the TBT down some 75% since the onset of the financial crisis in 2008. Mortgage Backed Securities (NYSE: MBB) have been winners, with the Barclays MBS Index rallying some 12.5% since the 2009 lows. However, with fed members hinting that the next round of easing could focus on MBS only, they may be a winner.
Copper (NYSE: JJC) almost tripled after QE1 and other stimulus policies and rallied another 50% from there after QE2. Copper may be a place for investors to put some capital if they believe that more QE is on the way. Oil has also benefited from QE, and so have oil companies. For those wishing to have less volatility than commodities, investing in miners or energy companies (NYSE: XLE) may make more sense.
In general, it will be a risk-on environment, so those wanting a more broad -based allocation to risk may wish to invest in a diversified portfolio, such as the UBS Fisher-Gartman Risk On ETN (NYSE: ONN). This ETN is a portfolio of various risk assets, such as Aussie Dollar (NYSE: FXA) futures, Canadian Dollar (NYSE: FXC) futures, crude oil, equities, and bonds.
