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The Most Consistent Trade of the Past Four Years

By Jeff Clark
Thursday, December 8, 2011

'Tis the season for higher interest rates.
 
It never fails. Interest rates move higher in December – at least, that's been the case for the past four years. Since 2008, betting on higher interest rates has been a consistently profitable trade.
 
Take a look at this chart of the 30-year Treasury bond yield...
 
 
The blue circles on the chart indicate the action in interest rates during the final few weeks of each year. Rates were already on the way up heading into the end of 2009 and 2010. They simply continued to trend higher in December.
 
But look at the action in 2008. Interest rates bottomed shortly after central banks around the globe vowed to increase liquidity to ease the 2008 financial crisis. Rates spiked higher through the holiday season.
 
The world's central bankers made the same promise last week. Perhaps we're in for a similar spike higher this year as well?
 
Here's how the iShares 20+ Treasury Bond Fund (TLT) performed over the same period...
 
 
TLT has declined in each of the past three Decembers. And it's down so far this December as well.
 
Of course, no trade is ever guaranteed. In fact, as soon as a trade appears to be predictable and fail-safe, it tends not to work anymore. But I haven't heard anyone else talk about this, which leads me to believe we might still have one more year to profit on this one.
 
If interest rates move higher, bond prices are going to move lower. You can profit off this trend by selling short shares of TLT. Or you can buy shares of the ProShares UltraShort 20+ Year Treasury Fund (TBT). This is a leveraged fund designed to return twice the inverse daily performance of TLT. So if TLT drops by 5%, TBT should rally by 10%, and vice versa.
 
Either way you choose, if you're looking for a high probability trade to make this holiday season, betting on higher interest rates looks like a pretty good setup.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

Jeff shared another one of his favorite holiday trades last January. He told readers to hold off buying shares of Weight Watchers until after New Year's resolutions died down. Following his advice would have led to quick 70% profits. Get the full story here: The 2011 Weight Loss Trade.
 
Growth Stock Wire classic: "Traditional rules of trading don't apply during the final two weeks of the year," Jeff writes. Read his advice on braving the December market here: How to Trade During the Holidays.

In The Daily Crux
Market Notes
Big pharma is breaking out... Bristol-Myers Squibb and Eli Lilly jump to multi-year highs.
 
Big tech names continue uptrend... IBM hits a fresh all-time high, while Intel touches a three-year high.
 
Still a "sideways" market for gold... prices are at the same level as they were four months ago.
 
Home improvement stores are in a "stealth" bull market... Home Depot and Lowe's quietly surge more than 25% in the past three months.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1258.47 +0.1% +2.9%
Oil (USO) 38.81 -0.5% +2.7%
Gold (GLD) 169.40 +0.7% +24.1%
Silver (SLV) 31.61 -1.0% +12.6%
U.S. Dollar 78.53 0.0% -0.8%
Euro 1.34 0.0% +0.7%
Volatility (^VIX) 28.67 +1.9% +59.4%
Gold Stocks (^HUI) 573.22 +0.3% -0.6%
10-Year Yield 2.02 -3.4% -36.1%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 126.73 +0.4% +5.2%
S. Korea (EWY) 55.81 +0.1% -1.9%
S. Africa (EZA) 64.74 +0.7% -5.9%
Canada (EWC) 27.58 +0.6% -7.7%
Japan (EWJ) 9.42 +1.4% -9.4%
Singapore (EWS) 11.71 +0.4% -11.1%
Lat.America (ILF) 44.64 +0.1% -13.4%
China (FXI) 36.82 +0.7% -14.6%
Taiwan (EWT) 12.19 +0.7% -16.4%
Israel (ISL) 13.60 -1.2% -18.2%
Russia (TRF) 15.24 -0.4% -30.4%
India (IFN) 22.11 +0.1% -33.2%

Sector ETFs
Symbol Price
Change
52-Wk
Utilities (XLU) 35.07 -0.1% +18.1%
Big Pharma (PPH) 70.37 +0.9% +14.9%
Retail (PMR) 21.79 +0.1% +12.4%
Health Care (IYH) 69.92 +0.7% +11.2%
Consumer Svcs (IYC) 71.75 +0.4% +7.6%
Big Tech (QQQQ) 57.08 +0.0% +6.7%
Real Estate (IYR) 55.66 +0.9% +4.2%
Industrials (IYJ) 63.93 -0.3% +1.7%
Internet (HHH) 73.18 +0.8% +0.8%
Defense (PPA) 18.10 -0.2% -1.1%
Software (PSJ) 24.52 -0.6% -1.3%
Transportation (IYT) 89.14 +0.1% -1.3%
Media (PBS) 13.18 +0.2% -3.5%
Insurance (PIC) 15.13 -1.0% -4.1%
Telecom (IYZ) 21.04 -0.8% -4.5%
Construction (PKB) 11.90 -0.1% -5.0%
Biotech (PBE) 19.41 -0.6% -6.0%
Oil Service (OIH) 122.27 -2.6% -8.0%
Basic Mat (IYM) 67.40 -0.2% -8.1%
Financials (IYF) 49.75 +1.1% -8.1%
Water (PHO) 17.05 -0.5% -8.4%
Semis (PSI) 14.14 -1.0% -12.9%
Nanotech (PXN) 6.44 +1.3% -36.4%
Alt. Energy (PBW) 5.55 +0.0% -44.8%

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