The longtime wait is over. It seems like just yesterday I was waiting for Ben Bernanke to breach his head from the alternate Keynesian dimension he lives in and give investors a peek into exactly how much more QE that we would have in store. This week, the Fed has a two day meeting that ends on Wednesday. Subsequent to the meeting ending, we'll be expecting a briefing from Bernanke that will no doubt move the markets.
The main focus of the meeting is going to surround what the Fed's next move for its quantitative easing program is going to be. Wall Street will wait anxiously to hear if the Fed will continue or taper its $85 billion a month in bond purchases.
Analysts, as reported by CNBC Saturday, are anxious to get clarity on the situation:
"I think it's time for them to establish some clarity," said Ward McCarthy, chief financial economist at Jefferies. "I think in terms of near-term balance sheet guidance and rate guidance, nothing will change. However, I think they will also add additional guidance that's specifically related to the timing and rate of the eventual wind down."
The markets have been looking nervous in general these past few weeks, as the blindly bullish sentiment seems to be tapering off without knowing what the Fed's clear plans are.
In my last article, "Make the Right Moves When the Fed Stops QE", I lay out a game plan for what moves to make should the Fed stop QE:
The only stocks I'd consider letting ride into a bear market would be consumer staples like Proctor & Gamble (PG), and stocks with Beta that indicates they in no way move due to what the broader markets are doing. Microcaps are traditionally stocks that do their own thing no matter what the market does, so if you're in a biotech microcap or a green energy stock that's awaiting a catalyst or does not move in correlation to the S&P average - those might be the ones you can hang onto as well. If you're going to hold stocks, it's a great time to think about sector hedges. If you want to hold McDonald's (MCD) through a correction, why not hedge by shorting Yum Brands (YUM) or Panera (PNRA)?
In addition, it's a great time to simply go short on stocks that you think are fundamental losers. Even the bull markets have their losers - going short on the losers is a great way to make money. In a bearish pullback, you essentially have two ways to cash in on a short:
1. The company has the fundamental appeal of Donald Trump's hairpiece and, like it, continues to slip and fall based on relative volatility of the underlying entity.
2. The broader market pullback effects all stocks across the board, whether they're fundamentally sound or not, pulling all stock back and bringing value to short positions.
In this article, I want to also offer two alternate plans - what to do if the Fed continues to buy bonds and doesn't seem to taper any time soon. You need to have a plan no matter what happens this week. I'm going to lay out bullet points for a few situations, and tell you how you could invest accordingly.
You Think the Fed Will Taper and the Markets Go Bearish:
This is the most likely situation, in my opinion. The Fed has alluded to the fact that they'll likely be pumping the brakes on QE at some point soon, and it's my contention that the market will pullback, at least for a correction of 5-10% before condensing and getting ready to make a trend move again. My portfolio for this situation would be similar to my "end of the world" portfolio that I laid out in a previous article. The portfolio would include any or all of the following:
- Small 5%-10% long position in staple stocks (AGNC, NS, ACCO)
- Medium sized position in actual gold or silver bullion
- Medium sized cash position in FDIC insured account or in person
- Small position in volatility ETFs and ETNs (like VXX) to be traded in the very short term
- Small long positions in gold and silver trusts (GLD, SLV)
- Medium sized long positions in inflation-adjusted Treasuries (AAA rated)
You Think the Fed Will Taper and the Markets Stay Bullish:
This is, to me, the least likely scenario to happen. If the Fed tapers, the smart money goes with it, causing the market to go bearish. If you think this bull market has enough strength to stand on its own and will continue to go up in the face of the Fed tapering, I'd be extremely cautious. I'd start with a portfolio of items that take advantage of both long and short moves. Then, after a few weeks, I'd position myself primarily bearish. From the start, though, this portfolio would include:
- Small to medium cash position
- Small long positions in silver and gold, as broad market hedges using iShares Silver Trust (SLV), SPDR Gold Trust (GLD)
- Small long positions in bullish ETFs, for short term swings like S&P SPDR ETF Trust SPY
- Small positions in bond ETFs, as broad market hedges, like iShares Barclays Aggregate Bond Fund (AGG)
- Large long positions in big dividend payers [AT&T (T), Coca-Cola (KO), Apple (AAPL)]
- Sector wide hedges for these by short positions like [Verizon (VZ), PepsiCo (PEP), Intel (INTC)]
- Long positions in smaller companies with growth potential (companies that have crazy beta or pay no attention to what the market is doing as a whole).
- Short positions in companies who do not seem fundamentally sound [like J.C. Penney (JCP), Radio Shack (RSH), Sears (SHLD)]
You Think the Fed Continues QE:
Maybe Bernanke surprises everyone (would it really be a surprise at this point?) and states that the Fed is going to continue QE at full force. This is likely to keep the bull market in its recent form, and we'd be looking at an almost guaranteed ride well above 15,000. From my perspective, a truly bullish portfolio allocation at this point would include:
- Small position in bonds
- Small cash position
- Large long position in large cap dividend payers [like T, KO, 3M (MMM)]
- Large long position in tech heavy staples [like Microsoft (MSFT), Google (GOOG), INTC, Cisco (CSCO)]
- Large long position in sector ETFs like Energy Select Sector ETF (XLE), Financial Select Sector ETF (XLF), Healthcare SPDR ETF (XLV)
- Large long position in small to mid cap up-and-comers with growth potential [Natural Gas Services (NGS), Kona Grill (KONA), AMC Networks (AMCX)]
- Small long position in biotech and other micro-caps/speculative [Celsion (CLSN), Cellceutix (OTCQB:CTIX), Fannie Mae (OTCQB:FNMA)]
- Small bullish options positions in major Dow (DIA) and S&P SPY Components
There is a small argument that the market could actually continue going bullish even if Bernanke's statements allude to the Fed backing off. This is a small chance, but isn't totally out of the question. It would only continue on for a short while, in my opinion, then eventually would taper off. The smart money sticks with what the Fed is doing.
I hope that you realize that the Fed is going to be the big catalyst this week, and that you have time to position yourself according to how you think the market will react. As always, I wish all investors the best.