By Andrew Mickey
Earlier this week, Warren Buffett repeated his warning “the economy would be in shambles.” Meanwhile, the Federal Reserve said, “The pace of economic contraction is slowing.” And central banks added it intends to keep short-term interest rates at record low levels for “the foreseeable future.”

And what happened? The markets came roaring back to life yesterday with no market-driving news. That’s because right now most news is just noise. Good news, bad news, “not as bad as expected” news, just fills the business pages. Most of today’s headlines are nothing but a distraction to investors.

We’re in the early stages of a long recession, unemployment is still on the rise, and most investors are still weighing the eventual impact of it all on earnings and expected future valuations. In short, we’re entering a long period of volatility.

So that’s why I recommend forgetting the day-to-day news and sticking to what’s important. And that’s time-tested strategies that work. Today, we’ll look at how one strategy any investor can follow can safely make us up to 30% over the next few months – whichever way the markets go. It’s All Relative

It’s been a wild couple of months for the markets. We’ve been through the strongest rally in 70 years. Still though, all the signs we’re entering a depression are still evident. But this is the stock market, driven by thousands of individual decisions, opinions, and analysis, so it’s impossible to predict the next move.

That doesn’t mean there’s nothing we can do though. There is. It’s just not as simple as buying a stock, have it go up, and then sell it anymore. In a market like this, where the struggle between hope and reality will linger on and keep volatility levels high, we’ve got to go a bit deeper in our tool boxes to find strategies that work in this environment. The one strategy needed to take advantage of this opportunity, relationship analysis, may be a new concept for some and require some more advanced investing techniques (in this case, shorting stocks).

Relationship analysis is founded on the principle that certain assets tend to be closely correlated over the long run. In a normal market, closely-related assets move in similar fashion. During periods of high volatility, the relationships sometimes get pushed way out-of-whack. Over time though, they almost always work their way back to historical norms. And that’s where the opportunity lies.

When a relationship gets extremely skewed, it can be very safe and profitable to ride it back to normal. Let me explain. Some of the most predictable relationships can be found in commodity stocks. Think of the relationship between the price of gold and gold mining stocks. As the price of gold goes up, so does the expected earnings of gold miners. The higher earnings justify a higher stock price. It’s the same across all commodities like oil, silver, fertilizer, copper, etc.

Other common relationships exist between commodities themselves. For instance, gold and silver prices have been closely related for centuries. The gold/silver ratio shows how close they are. Since they are both precious metals, one can be substituted for another. So when the price of one gets too high, the other catches up as it becomes the cheap alternative. Let’s take a look at the last skewed relationship we uncovered.

Why We Bet Against Gold in a Bull Market for Gold
The markets tend to focus on the near term and the short term. It’s always more interested in what’s going on today and a few weeks from now rather than what’s likely to happen over the next few months. That’s what creates the opportunity in relationship trades.

Just take a look at our “Trade of the Year.” This is an opportunity we caught on to last December. At the time, the relationship between gold prices and gold stocks had completely fallen apart as tracked by the Gold/XAU ratio.

The Gold/XAU ratio is a measure of index of leading gold mining companies (XAU – Philly Gold and Silver Sector Index) relative to the price of gold. Over the past 25 years, the Gold/XAU ratio has been about 4. That means an ounce of gold was worth 4 times more than the XAU Index. In December, however, the Gold/XAU ratio had climbed to 7.27. That’s nearly double its 25-year average.

It didn’t make any sense. And it wasn’t going to last. The relationship between gold prices and gold stocks was so far out of whack, something had to give. Either gold prices had to go down, gold stocks had to go up, or some combination of the two. That’s why we recommended shorting gold and buying gold stocks. Since then, the gold has held steady and gold stocks have risen significantly. Our recommended trade netted a low-risk 35% gain. Now, another closely related pair of assets has grown significantly out of whack and I expect similar gains over the next few months.

Why You Should Short Oil Now
The energy market has been very volatile over the past few months. Oil prices have nearly doubled from their lows a few months ago from expected demand from China, expectations the worst of the credit crunch is over, and hopes OPEC’s reduced production mandates will be followed.

Natural gas prices, however, haven’t fared nearly as well. Natural gas in North America is actually down about 50% from its credit crunch price levels.  Continued...