Five Best ETF Buys After Fed Unleashes QE3

September 14, 2012 /

Exchange traded funds rallied across the board after the Federal Reserve fired off another round of economic stimulus.

The Fed said it would buy $40 billion per month of agency mortgage-backed securities, MBS, and it would hold interest rates “exceptionally low” to mid-2015.

“This program is both appropriate and more aggressive than markets were expecting,” said Ryan Sweet, senior economist at Moody’s Analytics in Westchester, Pa. “The Fed is hoping to jump-start the housing market, which has been weak and unable to help spur the recovery. An open-ended QE (quantitative easing) program also will allow the Fed to ramp up monetary stimulus as the nation nears the fiscal cliff of tax hikes and federal spending cuts in January.”

SPDR S&P 500 ( SPY ) jumped 0.80% to a fresh five-year high. PowerShares QQQ ( QQQ ), tracking the 100 largest nonfinancial stocks on the Nasdaq, rose 0.96% to a new 12-year high.

SPDR Dow Jones Industrial Average ( DIA ) advanced 0.68%, climbing within 5% of its all-time apex from October 2007.

“Welcome to another round of an artificially induced, liquidity-driven bull market that will wax and wane until such time as the organic drivers of economic growth can overwhelm the secular forces of deleveraging,” said Alan Zafran, partner at Luminous Capital in Menlo Park, Calif. “In other words, it’s tough to fight the Fed.”

“Low interest rates, low to moderate inflation expectations and even sluggish growth allow businesses room to profit,” said Andre Weisbrod, CEO of STAAR Financial Advisors in Pittsburgh. “It’s better than another contraction. But this may only last a year or two.”

Where To Invest Now

This third round of quantitative easing should boost prices in gold, basic materials and financials, said Sam Subramanian, chief investment officer of Alpha Profit Investments in Sugar Land, Texas. Hard asset prices appreciate when the dollar weakens.

PowerShares DB U.S. Dollar Index Bullish ( UUP ) plunged 0.46% to its lowest level since May.

“This is a positive for stocks in the near term,” he said. “Over the long term, the effectiveness of the Fed’s approach will determine the course for stock prices.”

The largest ETFs tracking these sectors outshined the market. SPDR Gold Shares ( GLD ) vaulted 2.15% to a six-month high.

Financial Select Sector SPDR (XLF), rose 1.48%, advancing to just a hair below its 52-week high from March.
Materials Select Sector SPDR (XLB) jumped 2.35%. It’s now 2.4% above a 36.73 buy point in a bullish cup-with-handle pattern.

Cyclical and high-volatility stocks such as technology, industrials and materials will benefit most, says Charles Lewis Sizemore, founder of Sizemore Capital in Dallas.

“While the economy is slowly improving, (Ben) Bernanke fears a relapse into deflation,” Sizemore said. “This means he’ll err on the side of dovishness.”

Industrial Select Sector SPDR (XLI) leapt 0.94%. It cleared a 37.49 buy point in a classic cup-with-handle pattern.

Technology Select Sector SPDR (XLK) flew 1.24% to an 11-year high.

QE3 has no shortage of critics who contend it won’t truly spur growth and will merely push economic pain into the future, which could be brutal for the market.

“When it comes to the math of structural debt, this does nothing to solve the looming crisis; it only delays it,” said Weisbrod of STAAR. “Maybe that’s OK if delay allows time and the governments actually use that time to tackle the debt problem with honesty and practicality.”


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