The current consensus is that the Fed will announce some sort of significant quantitative easing program in early November following the Nov 2-3 FOMC meeting. What isn’t clear is just how large the program will be or exactly how it will be implemented. With this timing in mind, in addition to November elections, it’s important to be positioned for various outcomes during the month of October in anticipation of some potential significant moves in various asset classes in the weeks to come.
A primary consideration I should point out is that it appears as though a significant Quantitative Easing announcement has already been built into various facets of the market. The 10-Year Treasury yield has been hovering around 2.5%, touching 2.4% on some days down from 2.9% when this prospect was given serious consideration. Meanwhile, gold hit record highs during the early part of last week before correcting later in the week, and stocks continue to advance unabated, seemingly ignoring the perils of the yet to be resolve Foreclosure-gate scandal. It hasn’t hurt that roughly 85% of S&P500 companies reporting earnings have actually beaten their consensus estimates, but come the end of October, going into the FOMC meeting, investors could be in for a very rude awakening should the Fed determine no action or minimal action is appropriate. While most financial advisors would advise clients to stay focused on the long-term, this is one of the rare opportunities for active investors to take advantage of a somewhat binary market event, meaning the outcome will likely be large, moving several asset classes one way or the other. I’d be surprised if November traded in a tight range in other words. So, here are some key sectors and ETFs to watch.
For retail investors, the best method for playing moves in Treasuries would be ETFs. While I abhor leveraged ETFs as long-term investments, if looking to trade a somewhat binary outcome for November, it might be worthwhile checking out some leveraged Treasury ETFs. You can find several bond durations and long/short/leveraged options in this article on the Treasury Bond Bubble but primarily, I like using (NYSEARCA:TMF) and (NYSEARCA:TMV) for long/short 3X Daily 10 Year duration. These tend to be somewhat volatile so will likely see some action in November.
Gold and Silver
Gold gets all the headlines, but silver is actually more volatile (and a better performer) than gold in recent history. The most broadly utilized ETFs representing underlying bullion without the leverage would be (NYSEARCA:GLD) for gold and (NYSEARCA:SLV) for silver. Year to date, GLD is up 21% and SLV is up 38%. Leveraged ETFs include (NYSEARCA:UGL) and (NYSEARCA:GLL) for 2X daily gold long, short, respectively with (NYSEARCA:AGQ) and (NYSEARCA:ZSL) representing 2X daily silver long, short, respectively.
One should anticipate that if markets are underwhelmed by the Fed’s QE2 announcement, these precious metals will sell off dramatically since much of their buildup has presumably been due to anticipation of further devaluation of the US currency. If the QE2 announcement is substantial, as a confirmatory move, these may very well continue to rally. Surely, the pundits and traders everywhere will be saying precious metals are a must-have in an era of a government debasing its currency. If volatility is spiking following the announcement, watch for gold pairs trade opportunities like the one I exploited a few months back for easy low-risk returns. Just be mindful of tax rules for gold since bullion is treated as collectibles in some ETF classifications.
As one can imagine, the Financial sector has benefited tremendously from record low rates, effectively borrowing for free and lending it out (albeit selectively) while adding to their reserves to comply with FinReg and potential fallout from more mortgage write-downs. A broadly popular Financials ETF is (NYSEARCA:XLF), while the ETFs (NYSEARCA:FAS) and (NYSEARCA:FAZ) take long, short 3X daily positions in the Financials and have been wildly popular thus far this year given the relative volatility of the Financial sector of late.
An interesting play to watch should markets sour would certainly be Preferred Stock ETFs since investors will likely see a drop in share price there too, but given the virtual hybrid bond-like properties, they may very well scoop up preferred stock on Financials with the high yield to boot, realizing a disappointing QE2 announcement is unlikely to actually affect the solvency of these firms, just their near-term profitability to some degree.
At this point, I’m relatively agnostic directionally for November, but think the magnitude of the moves in these classes in November may be dramatic, so I will likely take some off the table by the end of the month, especially considering the stellar performance of many of the tech stocks in the portfolio which tripled the S&P500 over the prior month (portfolio performance/review).
Disclosure: Long GLD.