Using Bernanke's Speech to Set Your Trades for the Rest of the Year

Federal Reserve Chairman Ben Bernanke spoke to a group of bankers on Tuesday. In his speech, he reiterated much of what he has said in countless speeches over the past several weeks. However, he laid out fairly concrete expectations for the economy in 2011 that smart traders could take advantage of to profit. Bernanke expressed a belief in inflation being a temporary phenomenon. He stated that the Federal Reserve had done much to help the U.S. economy, but could not be called on to solve all its problems. He denied that the Fed was to blame for overheating in emerging market economies. Bernanke acknowledged that consumer prices have increased due to the rising price of gasoline, but blamed gasoline's bull-market on global factors unrelated to Fed policy. He stated clearly that the Fed would remain "accommodative" in its monetary policy decisions so long as job growth remained sluggish. Most importantly, he predicted that growth would pick up in the second half of 2011. If Bernanke is right, U.S. equities may rally as the U.S. economy strengthens. Job growth would accelerate, and the Fed could tighten policy to prevent inflation. But what if Bernanke is wrong? If Bernanke is wrong, and the U.S. economy does not strengthen over the second half of the year, the Fed may have to engage in a third round of quantitative easing. Alternatively, if the economy weakens and the Fed does not act, equities may tank. Action Items Bullish: Traders who believe that Bernanke is right in his assessment of future U.S. economic growth might want to consider the following trades:

• SPDR Dow Jones Industrial Average ETF DIA is a long play on the Dow. DIA may rally if the U.S. enters a full recovery.
• PowerShares DB US Dollar Bullish Index UUP is a long play on the dollar. If the U.S. economy improves, the dollar may rally on American economic strength and UUP may do well.

Bearish: Traders who believe that Bernanke is wrong in his assessment of the U.S. economy, and that there will be no meaningful economic growth for the rest of the year, may consider taking positions in the following:

• SPDR Gold Trust GLD is a long play on gold. Gold has traditionally done well in times of economic distress, and may especially rally if the Fed undertakes a third round of quantitative easing.
• PowerShares DB US Dollar Bearish Index UDN is a short dollar play. If the U.S. economy does not improve, the U.S. dollar may weaken as the economy weakens. If the Fed undertakes more quantitative easing, the dollar may weaken further.

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