By Panos Mourdoukoutas
Every investor who has been around Wall Street long enough knows that there is a time to buy and hold, there is time to sell and stay on the sidelines, and a time to trade. Now is the time to trade.
From late 2001 to the mid of 2007, there was a time to buy and hold stocks, as a string of interest rate cuts by the Fed provided a market "put" that fuelled a positive investor sentiment that turn every news on the economy into good news; stocks climbed one hill after another rewarding investors who bought and held stocks.
From the late 2007 to early 2009, there was a time to sell and stay on the sidelines, as residential and commercial real estate collapsed, taking Wall Street along for the ride. But then the Fed returned, writing several puts to support the market, launching QE1 and QE2; the positive investor sentiment, the "buy-buy" mentality" returned on Wall Street: The economy gets stronger, stocks go higher; the economy gets weaker, the Fed goes on with QE3, and QEn, and the market goes higher.
The Fed’s decision to end QE2 by the end of this month as planned, coupled with the on-going talks on U.S. debt ceiling and the sovereign debt crisis in Europe are about to change investor sentiment, again: from "buy-buy," to "maybe," as investors (and the Fed!) are confused about the direction of the economy. This is an ideal environment for three trades:
- Buy Ipath S&P 500 VIX Short-term Futures ETN (VXX) to profit from rising volatility, as investor sentiment will frequently shift from bullish to bearish and vice-versa with the release of government indicators that may give conflicting signals on the economy.
- Trade commodities on the short side of the market with ETFs, like SPDR gold shares (GLD) and Ishares Silver Trust (SLV), and Oil Service Holders Trust (OIH) that have been benefited from QE2.
- Trade on the long side defensive stocks with solid fundamentals and a good dividends like Pfizer, Inc. (PFE), and Bristol-Myers Squibb (BMY) that recently announced positive results of the late stage trial of blood thinner Eliquis.
Disclosure: Long VXX, PFE, BMY, Short: SLV, GLD, OIH