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Is The 'Risk On" Trade Coming to an End?

There’s a lot of talk right now about U.S. credit downgradesand whether we can possibly get a Washington budget deal that actually controls spending and borrowing.

Stocks are worried. And they should be. But there is an additional danger lurking out there that investors need to be paying close attention to: the end of QE2.

In the long run, I think it would be great if the Fed finally stopped pumping all this inflationary money into the system. But shorter term, my advice to you is "caveat emptor"— investors beware.

The so-called “risk-on” trade, which means the cheaper dollar alongside booming stocks and commodities, has been a staple of this market going back to Fed head Ben Bernanke's first QE2 announcement late last August.

Gold, silver, energy and oil, copper and raw materials, foods, have all obviously soared on this quantitative easing. And so have the exact same sectors in the stock markets.

But the risk-on trade may soon be replaced by the risk-off trade.

Keep an eye on next Wednesday, April 27th. That’s when the Fed releases its minutes. There may very well be an "end QE2 signal" and that could mean the beleaguered dollar—at least temporarily—will go up, not down. It might also mean that commodity, energy, and even industrial stocks could go down, not up.

Already, I notice the best performers have been defensive shares, like health care and utilities, not the cyclical economic growth groups.

There may be a correction in the cards as the Bernanke Fed’s ultra-easy money comes to an end. And that, investors, is what you should be looking out for right now.

Questions? Comments, send your emails to: lkudlow@kudlow.com

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