Who Needs More Stimulus?

CATWell, the answer to that question is probably "Nearly every corner of the market, particularly the riskiest sectors." It is a question worth pondering as the Federal Open Market Committee meeting concludes on Wednesday. Traders showed Tuesday that they are willing to bet that the Federal Reserve will finally signal that more quantitative easing is on the way.


This situation creates a double-edged sword. First, it’s not bad that stocks and some commodities are bid higher on hopes for QE3. Second, if the Fed doesn’t oblige, Tuesday’s gains could be wiped out in a hurry as disappointed traders realize stocks will have to stand on their own merits at a time when many cannot do that due to intense global macroeconomic headwinds.


Clearly, some sectors stand to benefit from more stimulus than others. As the risk on trade has been turned off, investors have flocked to consumer staples, health care, telecommunications and utilities names. Those sectors don’t need the Fed to ease more. If anything, those groups, a couple of which are now flooded with hot money, might be vulnerable in the even QE3 does arrive.


On the other hand, the beneficiaries are obvious, starting with gold. In gold’s defense, much of its current bull market, which has lasted more than a decade, has come without the benefit of monetary easing. However, previous versions of QE have been dollar killers. Since gold is denominated in dollars, a weaker greenback is usually good news for the yellow metal. Given recent strength in the miners, the play here might be the Market Vectors Gold Miners ETF (NYSE: GDX) over bullion.


Another sector that could use some QE love is materials. Battered by fears about the U.S. and Chinese economies, some materials names could use any and all help they can get at the moment. On the bright side, the Materials Select Sector SPDR (NYSE: XLB) has held up nicely in recent weeks. In fact, XLB’s chart has gotten progressively stronger over the past couple of weeks indicating help from the Fed would confirm a breakout for this ETF.


The industrial sector is another prime example of group that hasn’t been as bad as some would think. If anything, the Industrial Select Sector SPDR (NYSE: XKI) and its constituents have shown a fair bit of strength amid a spate of challenging economic data.


The scenario with XLI is simple: Industrial stocks can keep their heads above water for so long in the face of all this concerning data. Additional quantitative easing would, in theory, stimulate economic activity to the point were some money might come off the sidelines and into marquee industrial names such as Boeing (NYSE: BA) and Caterpillar (NYSE: CAT).

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