Sectors To Watch: Cash In On QE3 With Basic Materials!

| September 17, 2012 | 0 Comments

Materials Select Sector SPDR ETFLast week, Fed Chairman Ben Bernanke unleashed a third round of quantitative easing (QE3) on the US economy. 

The move by the central bank wasn’t unexpected.  However, the magnitude of the plan has reignited investors’ animal spirits.  And for good reason… the first two versions of QE had specific dollar amounts and time limits.    

But this time around, the Fed has committed to buying $40 billion of mortgage-backed securities every month.  And they’ll continue buying them until unemployment levels drop!

Put simply, this is an unprecedented move by the Fed.  And it just might work!

It’s no secret, business owners and managers have been slow to hire new workers.  And the main reasons they’ve given for not hiring is uncertainty.

Think about it… The people who make the decision to hire new workers saw an economy that was barely growing… even with the influence of the Fed’s previous efforts.  And they knew the impact of the previous QEs would only last for a short period of time. 

Put simply, businesses didn’t want to risk wasting money on hiring and training new workers.  It didn’t make good business sense if the economy was going to tank and they would be forced to fire all of them as soon as the Fed action ended. 

Now, the Fed has an open-ended QE.  It removes the uncertainty about what will happen to the economy when the current round of QE ends.  Because it’s not going to end until the economy improves.

In the context of creating a policy to encourage businesses to hire workers, QE3 is a stroke of genius.

What’s more, now that the US has embarked on another round of QE, I’m expecting more central banks around the world to follow suit.  It’s almost a foregone conclusion that China will announce some sort of stimulus for the Chinese economy in the coming weeks. 

A loosely coordinated effort by the central banks of several major economies will certainly spark optimism for a revival of global economic growth.

Obviously, when economies begin growing faster, they need more basic materials to fuel that growth.  So, it’s no surprise to see the Materials Select Sector SPDR ETF (XLB) surging higher over the last few days.

In fact, XLB shot out to 52-week high of $38.57 after QE3 was announced. 

As you can see, XLB is in a strong uptrend (blue line) off the 2011 lows.  And it recently broke out above resistance near $37.50 to $38.

Now that QE3 has been announced and with the likelihood of more central bank action around the world, I want to play XLB with unlimited upside and a limited downside.  This looks like a great opportunity for a simple call buy on XLB. 

However, a word of caution… wait for a pullback to the uptrend (blue line) before initiating the trade.   And don’t forget to give yourself enough time for the impact of the new Fed policy to be felt.  I would look at going out to at least January 2013 calls. 

Good Investing,

Corey Williams

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Category: Sectors To Watch

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.