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Trade Alert – The best way to set up for higher rates

May 28, 2013 by Cody Willard

I told you guys over and over that this ongoing stock market bubble could last longer and go higher than just about anybody thought possible. The stock market bubble we set up for four years ago when we launched Revolution Investing and I wrote the following are here.

http://blogs.marketwatch.com/cody/2009/11/05/a-couple-ideas-on-how-to-trade-the-money-supply-bubble/

“And I do think we’ll see a lot of strange asset appreciation turning into horrific and painful bubbles in the next five years…assuming the stock market is actually a part of that bubble – let’s picture the DJIA bubbling up to new highs and hitting 15,000….what’s the end game of that? Another bubble popping? More pain from trillions of misallocated capital.”

And thus, every market chart you look at is insane.

I’ve talked before about how sometimes the most important aspect of a big move in any asset is how quickly that big move developed. In other words, when you’re looking at Treasury Rates and trying to figure out some semblance of the next move rates are about to make, it’s often the rate of change and not just the change itself that is important.

If rates overall at at historic low levels, only seen once in recorded economic history as they are right now, then you know that at some point they will go higher. But as I’ve pointed out many times over the last few years, the question for higher rates isn’t if but when. And over the last five years, I’ve seen almost as many professional money managers and traders lose their shirts betting on higher rates as I’ve seen lose their shirts betting against the stock market bubble that’s now here.

As traders and investors, as protectors of our money, we have to be flexible and swing at the pitches the market throws at us when they get thrown. Trying to force a bet on higher rates and trying to time a top to this developing stock market bubble has been trying to bunt a wild pitch when you needed to just take the walk.

There’s never a bell that dings when the perfect pitch is being thrown. You have to read the signals, read the pitcher, read the pitch itself, and make sure you keep your eye on the ball into the bat. So what’s the upshot of all this analysis? I think it is indeed time to start scaling into some bets that higher rates are coming and likely to come fast when they do finally come.

Let’s run through a few different time frames of Treasury rate charts and you’ll see why I think it might be time to bet on higher rates finally.

The yield on a 10-year Treasury right now is down 80% from where it was thirty years ago.

Screen Shot 2013-05-28 at 11.51.19 AM

The yield on a 10-year Treasury right now is down 50% from where it was five years ago, and 30% from where it was just 700 days ago.

Screen Shot 2013-05-28 at 11.50.41 AM

But is “THE” turn here? The yield on a 10-year Treasury right now is up 20% from where it was 30 days ago.

Screen Shot 2013-05-28 at 11.49.55 AM

That 20% spike in rates over the last thirty days is big, though we’ve seen bear market rallies in the rate charts like this before. The biggest determinant on when higher rates will finally hit, is whether or not the US dollar remains a relative “safe” holder of value against the other major currencies (including gold).

The best way for most traders to set up for higher rates is to use one of the big Treasury ETFs and buy some slightly in-the-money puts on them dated out as far as possible. The best way for investors to set up for higher rates is to sell down all Treasuries and look for other places to park that money for the next few years.

I am going to step in and buy a few puts on the IEF, which according to its prospectus, “seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Barclays U.S. 7-10 Year Treasury Bond Index. The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds.”

I’ll start with put options in the IEF which will expire in January 2014 and have strike prices from $105 to $109.

Related posts:

Trade Alert: Trimming yet more SLV calls and a new short position
Trade Alert: A Little More Nibbling
Trade Alert - Scaling into one of our alternative energy ideas
Trade Alert: Putting Some Money To Work On The Long Side
Special Bonus for TradingWithCody subs: Free access to the coolest, smartest, most addictive stock m...
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Filed Under: Trade Alert

Disclosure: At the time of publication, the firm in which Willard is a partner and/or Mr. Willard had positions in some of the stocks mentioned above although positions can change at any time and without notice.

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This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or cryptocurrency or token any other product or service by Cody Willard or any other third party. Furthermore, nothing in this is intended to provide tax, legal, or investment advice and nothing in this should be construed as a recommendation to buy, sell, or hold any investment or security or cryptocurrency or token or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

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