By Christopher Diodato
Starting today, and continuing into Thursday, Ben Bernanke will be making statements regarding policy and general economic outlook. Since this will be the last meeting before the election in November, investors are expecting at least some new type of policy.
Before diving into the trade strategy, let's assess the market environment
- World economies are slowing
- The ECB has written a blank check to monetize European debt
- Manufacturing is contracting
- The unemployment report was a miss
- And most importantly; expected inflation is high
I place most importance on the last point, because it carries critical implications for any future actions by the Fed. Easing policy causes inflation, there is no question about it. However, when expected inflation is low, the real inflationary impact is diminished. When it is high, like now, the slightest amount of stimulus can unleash an inflationary frenzy. Therefore, within the Fed's dual mandate of controlling both inflation and employment, Bernanke must approach new stimulus with extreme caution.
Assume he unleashes the inflationary hounds
Inflation is often the final issue that drives an economy into recession, but during the inflationary period before that recession, stocks continue to advance. More specifically, energy, materials, and mining stocks advance, while most others move sideways. So here's the trade, using the energy ETF, (VDE).
It's typical that energy stocks, like those found comprising (VDE), lead the final push in any bull market, with profits driven by commodity inflation. In technical jargon, a close above $110 would activate a buy signal from a "symmetrical triangle" as well as a breakout from RSI resistance (Bottom indicator. For more information on the RSI, click here). For those who would rather trade the SPDR, (XLE), that chart gives a similar bullish conclusion.
Ben Bernanke has one last chance to give the economy a lift before the election. If he does, stocks will advance, but so will commodities. Buy an energy ETF to hedge against the inflation, and perhaps a hybrid car.