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QE 3 : What You Need To Know.

|Includes: iShares S&P GSCI Commodity-Indexed Trust ETF (GSG)

The QE3 announcement has just occurred.

There was little surprise in the announcement that the Fed will be buying up bonds for the foreseeable future. The market expected this.

What was a surprise is that the Fed announced a bond buying program which will be linked to the National Unemployment data. Here is the the before and after transcript from the WSJ.

As an investor how does this effect you?

- The unemployment numbers are now have an even GREATER impact upon the market and possibly an inverse effect. (The numbers go down, the Fed injects stimulus, the markets increase) It is currently impossible to predict how the market will react to these new changes, but we can postulate. Remember, unemployment is a lagging indicator. This means that they are very accurate of what has occurred in the economy about a month ago, but not very accurate about what is currently occurring in the economy. I believe this subtle difference will play a crucial role in the upcoming markets.

- Inflation is coming. Have no doubt that pouring more money into the economy will create inflationary bubbles. Look to the housing markets, the commodities markets, and the loan able funds market to watch for possible bubbles. Commodities have already begun to show a steady rise of inflationary pressure since the last QE and they are unlikely to stop now. Look at possible investments in GSG, a commodities ETF index to protect yourself and keep up with inflation.

- Volatility is here to stay. Since the Fed will not allow the competitive market to do its job, there will be a constaint rapport between the fundamentals driving the market and the Fed stimulus driving the market. As an investor it is imperative that you find a way to play these two forces against each other for a profit.

- Look to forward indicators to gauge the unemployment numbers. An investor trained in economics, the Fed linking their stimulus to unemployment is a gold mine. Forward indicators move ahead of lagging ones, and if your forward indicators, such as housing permits, Manufacturing indexes, Inventory Indexes and others, move together, you have a good chance to be able to predict the move of the Unemployment Data. BE WARNED. I am very unsure if the markets will respond to low unemployment (and its likely coming) with enthusiasm for bond buying, or with stagnation for expected outcomes.

My Economic Indicator:

- My Osprey Economic Indicator is a composite of forward indicators and it has shown two very negative fundamental readings over the past 2 months. These readings imply that the fundamentals of the market are deteriorating and if it continues, the market will eventually wise up. Watch for an extreme dip if the fundamentals continue to decay.

My Suggested Strategy:

- Stay in broad index like areas. Liquidity is key right now because of the continuing volatility. You need to be able to get in and out of investments lightning fast. Try to find average zones of these markets and use options to limit your downside risk. If you find the market is at one of your average (normalized) levels, use a straddle (buy a put and a call) and ride the volatility by selling off one leg at a time.

-Another possible strategy which I am considering is to play the Fed against the fundamentals. Imagine market volatility as a wave with a strong beginning and a long tail end. Unemployment numbers are going to shock the market every month, time and time again because of their increased significance. So, sit back one month and see how the market reacts to the first unemployment numbers. After that, the excitement will recede and the market will slide inverse to the initial surge. Once you have established how the market responds to Unemployment, check out how your indicators are predicting the unemployment for next month. Use a vertical options spread to position yourself for the surge and sell when the volatility is highest. After the surge create another vertical spread for the long slide back down towards a normal level.

Keep in mind that this bull market has been propped up on words and the printing presses. There is very little fundamental basis for the sustained increase we have seen over the past few months. The whole house of cards could easily see some wind and fall in at a moments notice.

Remember, Insight is the father of Foresight.