Monday, November 1, 2010

Getting ready for Bernanke comments on QE2

I usually hate to come into news events with any kind of fundamental bias, and no matter what is spoken on TV, the big boys will ultimately push the markets wherever they want.  However, in this case, this is what I'm thinking going into this event:

  • Historically, Fed days are up days in the equity market, as the fear leaves the market upon words being spoken.  There is a fairly strong upside edge to being long equities going into the Fed day.
  • Last time QE2 was mentioned a few weeks ago, EVERYTHING (equities, gold, T-bonds) ripped higher
  • The market has been prepped by thinking that QE2 will be done through the purchase of T-bonds.  I haven't come across anything in which people have considered many other methods of QE (this is the key point for my pre-news trade)
  • PIMCO, which recently seems to have a direct line w/ Bernanke, has been selling volatility in T-bonds ahead of this event, meaning they don't think the news will move the T-bond market much.
  • Equities and gold have been pretty strongly correlated, probably due to their inverse relation to the low-interest-rate US Dollar.  Gold has generally been stronger than equities, as it should be, as virtually all global central banks would love to debase their currencies at this time.
Taking all this into account, I want to be long gold/silver hedged with short T-bonds.  My thinking is that if anything is uttered about easing through means other than through T-bond purchases, gold/silver will leave T-bonds in the dust.