By John Nyaradi
Ben Bernanke's announcement of a third round of quantitative easing on September 13 created plenty of excitement. One of the novel features of QE 3 is that it is open-ended.
Under the new program, the Fed would begin purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and that this will continue " for a considerable time after the economic recovery strengthens ".
Although some economic "rough patches" surely lie ahead, the adage "don't fight the Fed" should be kept in mind. As we saw during QE 1 and QE 2, the stock market frequently rallied on days which brought horrible economic news — simply because Big Ben had his liquidity pump flooding the stock market with readily-available cash.
This time around, a growing number of investors want to be ready to take advantage of the opportunity to benefit from their own "economic recovery" plans, and focus on those sectors which are likely to produce the best results during QE 3.
Based on what we have seen during previous quantitative easing programs, the most likely sectors to produce big gains are the precious metals and commodities sectors.
The stock indexes which have done the best were the Russell 2000 and the Nasdaq-100 Index. Therefore, the iShares Russell 2000 ETF (NAR:IWM) and the PowerShares QQQ Trust ETF (NASDAQ:QQQ) should be on any watch list that includes stock index ETFs.
The iShares Russell 2000 ETF has been soaring to new highs and is now well above its 50- and 200-day moving averages.
The PowerShares QQQ Trust ETF is on a similar trajectory, above both the 50- and 200-day moving average and enjoying the new horsepower and excitement being generated by the new iPhone, which everyone in the world seems to want.
In the precious metals sector, the most heavily-traded ETFs are the SPDR Gold Shares ETF (NAR:GLD) and the iShares Silver Trust ETF (NAR:SLV) .
The SPDR Gold Shares ETF is the biggest gold ETF and, during the first two rounds of quantitative easing, it made fantastic gains. As the dollar weakens with the Fed pumping fresh money into the market, the price of gold jumps and now some analysts, including Bank of America, are predicting gold above $2,000/oz by the end of the year.
Silver glitters brightly, as well, with the dominant silver ETF in strong uptrends and above major moving averages and resistance levels. iShares Silver Trust is also on a point-and-figure buy signal with an upside price objective about 50% higher than current levels.
In the commodities sector, oil is the one to watch and the United States Oil Fund LP ETF (NAR:USO) is the most heavily-traded oil ETF. USO is in a volatile phase right now with potential conflict in the Middle East coupled with rumors of releases from the country's strategic petroleum reserve.
Quantitative easing generally pushes more money into commodities, and the current tensions in the Middle East could easily send the price of oil significantly higher.
While economists and analysts debate the pros of cons of QE 3 and how it could help or hurt the economy, it seems clear that quantitative easing is good for investors. How long these beneficial tailwinds will last is unknown, but the current environment could provide another opportunity for investors to fatten their portfolios over the coming weeks and months.
Most major markets are now overbought as a result of last week's action, but with Big Ben at the controls, they could stay overbought and in bull markets for a long, long time to come.
John Nyaradi is Publisher of www.WallStreetSectorSelector.com which specializes in ETFs and sector rotation techniques.
