By Nigam Arora
There is an old adage: Do not fight the Fed. Those who follow it are often rewarded with handsome profits.
It is not as easy as it seems on the surface because the Federal Reserve Bank does not directly advise on gold, silver, stocks and bonds. To generate profits, investors have to read tea leaves.
The Federal Open Market Committee (FOMC) of the Federal Reserve just released its customary statement after its meeting on March 13, 2012.
The following excerpt from the FOMC statement tells the story:
Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Fed has begrudgingly acknowledged improvement in the economy and there is no sight of QE3.
Here is the reading of the tea leaves:
Buy stocks especially high beta stocks and financials. ETFs of interest are SPDR S&P 500 SPY +0.12% , PowerShares QQQ Trust QQQ +0.33% , iShares Russell 2000 IWM -0.02% , iShares MSCI Emerging Index Fun EEM -0.45% , and SPDR Select Sector Fund - Financial XLF -0.07% . The environment is ripe for rewarding picking individual stocks.
Sell bonds. ETFs of interest are iShares Barclays 20 Year Treasury TLT -1.29% , ProShares Short 20+ Year Treasury TBF +1.31% , and ProShares UltraShort Lehman 20+ TBT +2.64% .
Sell gold and silver. ETFs of interest are SPDR Gold Trust GLD -1.35% , iShares Silver Trust SLV -0.95% , Market Vectors Gold Miners ETF GDX -2.94% and Market Vectors Junior Gold Mine GDXJ -3.37% .
Buy the U.S. dollar. ETFs of interest are PowerShares DB USD Index Bullish UUP +0.25% , Rydex CurrencyShares Euro Currency FXE -0.18% , Rydex CurrencyShares Japanese Yen FXY -0.77% , and Rydex CurrencyShares Australian FXA -0.66% .
No bell is rung at the end of the cycle. Identifying the end of the cycle, as well as the leaders for the next cycle, early is the key to generating wealth. Time has proven the call from October 2011 based on the ZYX Global Multi Asset Allocation Model to be spot on. Back in October 2011, the following characteristics of the new cycle were identified:
