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Nov 13 2013 - Ok so why did I buy TBT a few weeks ago and now I am on the sidelines, but planning ot return, what is the point? Well the short answer is bonds go down in value when they are replaced by newer bonds that have a higher interest rate. So bonds are a good thing to own when rates drop (like the last few years) and are to be avoided in a rising rate environment. (the next few years).

It you are still confused read this.

I started to talk about bonds in my May 11 2013 Market comment, where I spoke of the death of Mr. Bond. Now is the next leg in that story. OK so who cares about bonds? Well not me, at least not for years. To me bonds were boring, I like stocks that pop and make a fortune, overnight riches! But as I get older I see why "Gentlemen prefer bonds". Bonds move in stable long-term directions and so they are often easier to predict than equities.

So how do I know that interest rates will be going up? you might ask. Well the answer is there are not a lot of options for them to go lower than zero, and the economy is picking up so it would be dangerous to leave them too low, too long. The danger is that this is a bit like a coiled spring, up until now banks in the U.S. did not want to lend because as rates are falling they can make more money buying the 20 year U.S. treasury note. However in a rising rate environment consumer and business loans are more profitable. All that pent up capital is about to be unleashed in a flood of credit.

Remember most money is not printed on printing presses it is invented by lending it. So we are headed toward a potentially inflationary environment, more reason to raise rates.

Now we are finally seeing a rise in rates as investors consider the reversal of Fed policy. It is the potential end of QE, or at least a slowdown in the program, that is pushing rates up. This has led to a very strong rally in TBT, which delivers 2X the inverse daily return of the Barclays U.S. 20+ Year Treasury Bond Index. The long fund that tracks that index is iShares Barclays 20+ Year Treasury (TLT). In the past month, TLT is down 6 percent and TBT is up 12 percent.

Big Picture
So from a big picture TBT will be the best play for a long time to come. Look at the bottoming process over the last 5 years. It is not hard to imagine a three year double on this ETF.

Dennis Says:
Here is a bit by Dennis Gartman that sums it up. Dennis Gartman of the Gartman Letter, sees a bear market ahead and is shorting bonds ahead of Janet Yellen's testimony in front of the Senate Banking Committee.

What am I Yellen About
I respect Dennis Gartman but for now I think he is looking at this thing through a telescope. The new fed chairwoman is Janet Yellen and she has made nothing but “dovish” comments about the QE program. In short she has no fear of inflation and great fear of deflation. I think rates will drop slightly as everyone sees the fed is going to be doing QE well in to 2014.

The Economist Magazine has been talking in the last issue about how Inflation is not a big a fear as negative inflation, a funny term that I think means deflation. Mr. Carney in London and Ms. Yellen in Washington are clearly not interested in ending QE now. 

All in the Charts
As usual all the talk can be ignored. You can see what is happening in the charts, a short term pullback in a long term uptrend.

Small Picture
The TBT has had a great run but if you look at the same graph from and RSI or a slow stochastic view, it looks overdone here. 

The time to buy TBT is the next retrace of the stochastic under 20.

Caution Juiced ETF
TBT is not a fund for investors to buy and forget. As noted earlier, investors holding TBT would have lost more than 75 percent of their value. Furthermore, TBT suffers from tracking error because it resets daily. If TLT were to fall 10 percent and then rise 10 percent, it would be down 1 percent, but TBT would be down 4 percent, or 4 times the move in TLT over two days. TBT is for traders and sophisticated investors who use market timing, and not for buy-and-hold investors.
Risks aside, TBT is a solid trading vehicle for a period of rising interest rates that we are in. Conservative investors will do best by reducing their exposure to long-dated bonds during rising interest rates, but aggressive investors and traders can try to capture some of the downside move with ETFs such as TBT that move double or even TMV the triple short 20 Year US Treasury.

Here are ETF your choices
TLT - 1X 20 Year US Treasury
UBT - 2X 20 Year US Treasury
TMF - 3X 20 Year US Treasury

TBF - Short 1X 20 Year US Treasury
TBT - Short 2X 20 Year US Treasury
TMV - Short 3X 20 Year US Treasury

How to Play
The way you play this is wait for a chance to buy TBT, which provides a double-short position on long-dated Treasurys. Now all you do is buy TBT when it is generally pointing up, sell (or buy TLT (dangerous)) when TBT points down. If that is not simple enough,  I have drawn a graph for you and I have added two indicators, TSI and Aroon. As you can see the obvious on both indicators, when the "good line" is above the "bad line" it is time to buy and pretty predictably. On TSI the good is black and on the Aroon Green is good and in both cases red is bad. (click any graphics to enlarge)

As you can see this is a simple game, unlike trying to figure out if Apple will beat Amazon this Bond fund moves in nice stable patterns. Those trends can go on for years. So wait for the next cross, use Aroon or TSI to pick your long term view, and the stochastics or RSI to time your entry.