The Bottom Of The Interest Rate Cycle – An Investment To Make For Decades

If these symbols ring a bell to you, you know the direction of this article.  TBT, TMV, SAGG, IGS.

It does not take a market wizard to tell you that the greatest opportunity to buy stocks is at the very end of a bear market.  Once a disconnect between fundamentals and psychology takes the market to extreme lows, smart investors know that the risk of loss is suddenly limited.  On the contrary, very often, the best time to sell stocks, or anything for that matter, is near a broad market peak.

So, bonds topped from a 30 year secular bull market in July of 2013.  As indicators of economic conditions now finally point to more growth, and the federal reserve talks about tapering their nearly 5 year long bond buying program by the end of this year, one can almost say this with certainty.  So, as of today, people who want to bet against bonds are exactly one year late, which might lead them to hesitate shorting government and corporate debt.  Is it too late?  Let's take a look at another example.

The S & P 500 bottomed from the worst bear market since the Great Depression in March of 2009.  If you were exactly one year late, and bought the S & P 500 Index in March of 2010, you would still be up over 65%, before adjusting for dividends, which makes the percentage gain closer to 75%.  Thus, in long term trends, a year is close to insignificant.  And, if bonds are about to enter a supercyclical bear market for the next 25-30 years, then shorting bonds for the long run now appears like a very low risk proposition.

Remember, the interest rate cycle repeats over time, closely matching the 52-57 year Kondratiev Cycle.

http://upload.wikimedia.org/wikipedia/commons/thumb/3/31/Federal_Funds_Rate_1954_thru_2009_effective.svg/640px-Federal_Funds_Rate_1954_thru_2009_effective.svg.png

That said, one might even consider, despite the climb in interest rates over the past year, buying a longer term mortgage, or getting a longer term loan.  Probabilities certainly favor new, longer term borrowing to be profitable (in terms of increasing your net buying power).

So back to the trade.  (TBT), a double leverage fund that moves inversely to the 20 Year Treasury Bond, has recently exhibited signs of accumulation, and finally, made a breakout to new yearly highs.  In the chart below, look at the volume bars and how volume picked up in recent months.  Also notice how most of these bars are white, meaning that the volume was mostly the volume of new buying.

http://s9.postimg.org/jtl98pofz/TBT_Volume.png

Then, consider the bottoming pattern taking place over the last year.  Typically, long term bottoms have a familiar look.  The stock, ETF, index, debt instrument makes a new low, then the security attempts to make another low, but sellers find themselves pushing into a mass of new buyers actively accumulating.  The attempt to make new lows fails.  Finally, a break to new highs, and generally a pullback.  You then have a new uptrend.  Does the chart below have all of these steps of a major bottom?

http://s23.postimg.org/pab4kr0cb/TBT_Bottom.png

The bottom line is no, you are not too late to come into the party.  This is an opportunity that comes along, depending on when you are born, once a cycle, or lifetime.  So don't wait for the new cycle of expanding growth, rising interest rates, and rising stock prices will leave you behind.

Profile photo of MetroTraderMetrotrader (D) is one of the few practicing CMTs (Chartered Market Technicians) in the United States . The CMT certifies his knowledge of market timing and risk management approaches. He tends to look for broad market moves and take advantage of them with index funds. The strategy he principally uses is mostly quantitative, and, tested, and has avoided or capitalized on every major recession since the 1940s. He says the best way to make money is to avoid losing it in the first place.

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