Last Friday was an interesting day. The broader markets in the U.S. fell over 2.5%. The plunge was widely attributed to hawkish statements made by the Boston Federal Reserve’s President pertaining to future interest rate increases. Today’s market rebound was again attributed to Federal Reserve members commentary on the short and long-term view of interest rates. In particular, Fed governor, Lael Brainard, spoke extensively at The Chicago Council on Global Affairs. Her commentary was seen as primarily dovish.
The last two days of trading have been ‘odd’, especially in the recent environment that has lacked much volatility. Many pundits have their sights set on discussing and predicting if the market will regain its footing and continue plodding upwards. This is certainly a valid concern, yet other areas should be considered, too.
Where are we along the timeline of straying from the near 0%, 0% and negative interest rate world we are living in? Are we at the start, middle or end? The case can be made for all three. In fact, you can see the arguments among the world’s largest governing monetary body, the U.S. Federal Reserve. Different members have different opinions of how soon their policy making direction should shift. We could take the same path as these policy makers and speak until we are blue in the face as to where the Fed’s direction is headed and how soon it will shift.
As an investor the primary objective is to make smart investments that pay off. Right now we have a lot of information coming from the Fed and other commentators as to what the future holds at the Fed’s September meeting, December meeting and beyond. Uncertainty can bring risk and can bring opportunity. One way to hedge yourself in light of this environment is through the use of an inverse exchange traded fund (ETF). Such a fund allows you to place a short position against a particular investment (bet against rising values).
ProShares Short 20+ Year Tresury (TBF) is an instrument for shorting a section of the bond market. Interest rates are at historically low levels and some signs are being given that they might be creeping upward in the not too distant future. For example, an increase in inflation will likely push the Fed to move to increase interest rates. TBF has an inverse relationship with bond prices, which means the security is built to increase as interest rates rise. The simple idea of interest rates increasing can make this security rise, as was seen last week and today. The market is forward looking.
It’s wise to be calculated in the development of your investment strategy and positions. From the chart below you can see shaded horizontal lines showing resistance and support. These approximate levels could be used as buy or sell guidelines for entering or exiting a trade. Certainties are rare in investing. Therefore, strategic planning is necessary. TBF or TBT (x2 leveraged) could be an option when crafting your portfolio’s allocation as we progress towards the conclusion of 2016.