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Tuesday, September 18, 2012 - 06:30
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Tuesday, September 18, 2012 - 06:30
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Tuesday, September 18, 2012 - 06:30

The Simplest Way to Make a Possible 30% by Election Day

Tuesday, September 18, 2012 - 6:30am

Trading desks around the world are still buzzing from Thursday, Sept. 13's announcement by the Federal Reserve that it will expand its mortgage-backed security purchase program to $40 billion per month for an unlimited period of time. The term de jour for this new game-changing policy among the pros is "QE Infinity," and I think that pretty much says it all when describing the pledge by Fed Chairman Ben Bernanke and crew to basically keep printing as much money as they think is required to try drive mortgage rates down and to revive the labor market.

For investors, the read here is that the Fed's decision, along with last week's announcement by the European Central Bank (ECB) that it would step in and buy bonds, represents a coordinated effort by monetary policymakers to reflate our way out of the economic doldrums.

Will this work? Well, I suspect not, as the creation of more money to this point via QE1 and QE2 has largely failed to do what the Fed intended it to do. However, one thing the Fed's previous QE decisions have done is to help bid up both stocks and hard assets such as commodities, and in particular, precious metals.

Before we get to today's trades, as an illustrative exercise, let's go back and take a look at how these sectors fared during the previous rounds of quantitative easing. First, if we use March 2009 as the beginning of QE1, and April 2010 as the end of that round of stimulus, we see that the S&P 500 surged more than 60%. Now, keep in mind that this gain was off the very lows of the market following the financial crisis that almost caved the entire global economy, so the results are somewhat skewed.

The table below shows the gains we saw during QE1 in stocks, gold, agricultural commodities (DBA) and base metals (DBB). It also shows the decline in bonds over that time. (Big thanks to my friend Tom Essaye of the 7:00's Report for expertly crunching the numbers, and for his insight on the QE market moves).

During QE2, which began in August 2010 and continued until June 2011, we saw another period of big gains in stocks, gold and commodities, and another sell-off in bonds. The gains here were far lower in equities than during QE1, but they were about the same in gold and even stronger in agricultural commodities, as the table below demonstrates.

The takeaway here is that both previous rounds of quantitative easing were successful at inflating asset prices, although the marginal returns on the whole decreased significantly between rounds one and two. And while QE is far from the only factor in the markets, it's a big enough factor for us to say with confidence that stocks, gold and commodities are likely to continue moving higher for some time thanks to the a much bigger, and more aggressive, QE3 policy.

If this thesis proves correct, then there are three simple ways to play it. You'll want to be long the following funds going forward:

1. SPDR S&P 500 (NYSE: SPY)
This is the most basic, and one of the most widely held, exchange-traded funds (ETFs) out there, and for good reason. The SPDR S&P 500 allows you to own the entire benchmark measure of the domestic equity market.

So far in 2012, the fund is up nearly 17%, and it's now just about 7% from its all-time high. It is my contention that despite the headwinds facing the market here -- e.g., Europe, China's slowdown, flat lined U.S. economic growth -- the QE3 tailwind will more than counteract them. As such, you'll want to be long the domestic equity market, and that means owning SPY.

2. SPDR Gold Shares (NYSE: GLD)
The SPDR Gold Trust is an exchange-traded fund that is a proxy for the spot price of gold. As we've seen from previous rounds of QE, gold is an asset class that's been bid up higher as traders pile into hard assets whose demand isn't highly correlated to growth in the economy.

The gold trade also is a bearish bet on the U.S. dollar, as the more supply of dollars out there the less those dollars will be worth in real terms -- and the more dollars it will take to add up to one ounce of gold.

3. PowerShares DB Commodity Index Tracking (NYSE: DBC)
The PowerShares DB Commodity Index Tracking ETF is a proxy for the Deutsche Bank Liquid Commodity Index, which includes oil, natural gas, gold, silver, industrial metals, and agricultural commodities such as corn, wheat, soybeans and sugar. This ETF is one of my favorite ways to be long the entire commodities space, and with QE Infinity now a reality, look for this sector to continue being bid higher.

Action to Take --> Buy SPY at the market price. Set initial stop-loss at $135.70. Set initial price target at $162.25 for a potential 10% gain by Election Day (Nov. 6).

Buy GLD at the market price. Set initial stop-loss at $158.25. Set initial price target at $189.20 for a potential 10% gain by Election Day (Nov. 6)

Buy DBC at the market price. Set initial stop-loss at $27.43. Set initial price target at $32.80 for a potential 10% gain by Election Day (Nov. 6).

This article originally appeared on TradingAuthority.com:

The Simplest Way to Make a Possible 30% by Election Day

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.