CTMPR

During the financial downturn and the ensuing recession treasuries rallied sharply sending bond yields to their lowest level since the early 70’s.  Now that the economy has begun to come back to life and the fed stimulus has driven commodity prices to multi-year highs, bond yields are beginning to rise.  This has caused investors to look through the various short bond ETF products to find the best way to capitalize on falling bond prices.

There are several different options to choose from depending upon whether you want Double, Triple or No Leverage in your position.  The first two products are sponsored by ProShares and trades under the ticker symbol TBF.  It does not use leverage and is  designed to be the exact inverse of the most popular long treasury ETF – TLT.   It is the least popular short treasury etf but still has good trading volume.

The second product is the Double Short Treasury also sponsored by ProShares – TBT.  It’s designed to be a 200% inverse of TLT, so if TLT falls 1% on a given day TBT is supposed to rise 2%.  TBT is designed for trading so it is very popular with traders, with average daily trading volume of 15 million per day.

The third is also popular with traders because it offers 3 to 1 leverage  but only has 1/10th the daily trading volume of TBT at this point.   It’s sponsored by Direxion and trades under the ticker symbol TMV.  It is designed to move the inverse TLT the same as TBT but it’s 300% instead of 200%.

One thing to know about these instruments is that they are designed to be trading tools, not long term investments.  If you hold them for longer periods of time the negative effect of the derivatives becomes very obvious.  The site below will show how these various short treasury ETFs have performed compared to each other.

Information Source:  http://bond-etfs.com

In a world economy that seems to be increasingly driven by the emerging market demand for commodities it’s crucial to have some knowledge about Brazil which has become a commodity powerhouse.  Brazil is the largest producer of Sugar Cane and Oranges as well as the second largest producer of Dry Beans and Soybeans.  It has also become a net exporter of crude oil, coffee, beef, chicken and ethanol.

From an investment standpoint the Brazil ETF – EWZ has been one of the best performers in the recent recovery from the 2008-2009 lows.  The number of ETFs that focus on Brazil has also grown as both the Brazilian economy and investor demand have proven to be robust.  One of my favorites is the Brazil Small Cap ETF – BRF which seems like it would be a volatile but well positioned fund in a post recession environment.   Having the double benefit of the tendency of small caps to outperform large caps over time along with the tail wind of a fast growing emerging economy seems like it should be a good combination.  With both small caps and emerging countries volatility is high, so be careful.  Brazil was one of the hardest hit markets during the credit crunch as you will see by the long term charts.

To see how BRF performs relative to EWZ you can take a look at this site:  http://brazil-etf.com

People often talk about a bull market and in general this means that the stock market is going up.  The reason Wall Street uses the Bull and Bear to describe the trend of the market is because when a bull attacks it goes up with it’s horns.  When a Bear attacks it goes down with it’s claws.  So that is where the analogies for an up or down market originate.

How do you know if stocks are in a Bull Market?

This is probably the most important piece of information that any investor can possess and yet very few people talk about it.  We sit and listen to all the economists on CNBC blabbing about the economic data but that has little to do with whether the market goes up or down.   Fundamentally, stock prices are dependent upon the level of future corporate earnings.  When you look back over time you can see a very high correlation between the combined earnings of the S&P 500 companies and the level of the S&P 500.  The market tends to lead the earnings growth by about 6 months, so the market usually turns up or down ahead of actual earnings changes.

Best Bull Market Technical Indicator

Over the years I’ve read many different philosophies such as using sentiment indicators, RSI Divergence, Moving Average Convergence/Divergence (MACD) but nothing even comes close to the power of the 20 Month Simple Moving Average.  In fact, if I could only use 1 single data point for investing… this would be the one.

Take a look at this chart and you will see why:

By looking at this chart you can see that by simply being in the market during the bull market phase when the price is above the line and out when the price is below the line you would’ve done quite well.  In fact, you would’ve captured the majority of both runs in stocks and missed out on two devastating declines in the past decade.  You can see that in 2009 we got back above it and then had a retest of it in August 2010.  That successful retest lead to the incredible rally we had this fall.  In early to mid-2011 there will most likely be another retest which would be similar to what happened in 2005.  When you see the market go down and hold support at that average, that is usually a low risk time to add to your stock holdings.  When the market gets too far ahead of itself (like right now), then it’s a good time to cut back on your holdings.  It’s a very simple system.

If the market closes out a month below the line and doesn’t immediately recover then you should seek protection by moving to cash, buying put options or even use a Short ETF.  Many people try to speculate on a stock market crash, but I have found that to be a very difficult thing to do.  If you are going to try, only do it when the market is trading below the 20 Month Moving Average.  That will tend to keep you from fighting the tape.

I find it easier to follow a technical indicator than to monitor the earnings of the S&P 500 companies, so that’s why I use the 20 Month SMA as my primary indicator of whether we are in a bull or bear market in stocks.