Trying To Figure Out The Future

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Reader Pat had a follow up question regarding my recent post titled Head Fake.

Thanks for your response to my recent question about capitalizing on the inexorable rise in interest rates. HOWEVER, you did not really answer my question which was not to bemoan my loss in TBT but rather to determine how one can profit from the rise when it occurs.

That is, when the rates rise, the market as a whole – with few exceptions – will get clobbered, setting off sell orders. When I and others have to retreat to the sidelines, are there any ETFs that we can use to directly profit from the increased rates?

Short or buy puts on long term bond ETFs? Go long on SH? Anything else come to mind?

Thanks. It is wise to address the inevitable in advance.

While it is indeed wise to plan ahead, going too far out would be simply trying to predict the future which, when tracking trends, I don’t engage in. The fact that we are on the dark side of a burst real estate/credit bubble of never seen before dimensions is cause for great concern. Trying to make any early guesses as to how this scenario may play out, is gambling at best.

My mode of operation is to wait and see which areas of the market place will develop upward momentum once stocks have corrected. You can easily track these changes by using my weekly StatSheet.

Here’s how:

Simply focus on the column titled %M/A, which shows you how far below or above its own trend line a fund/ETF is currently positioned. You want to watch for transitions when a fund moves from below its trend line (a negative number) to above its trend line, which then will be represented by a positive number.

Since the trend line is the dividing line between bullish and bearish territory, I will predominantly focus on these changes, especially when a fund crosses to the upside.

Once that line has been crossed, I will wait a couple of trading days, before placing an order to buy. Since many ETFs represent short positions as well, you no longer have to specially sell short, if that’s what you want to do—just use the appropriate ETF.

Letting the trend come to you first before taking a position, rather then you trying to predict and force the issue, will enhance the odds of you being successful. Sure, we all like to have that crystal ball but, since we don’t, working with trends is the best way I know of to identify changes in momentum.

Should I ever find that crystal ball, I am sure that I will get an invitation to Omaha, Nebraska for lunch to meet with you know who.

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Comments 7

  1. Ulli, I enjoy reading your posts. thanks. I noticed in Schwab StreetSmart software they provide trailing stops. I checked them manually and they are correct and dynamic during trading session

    MK

  5. I think it was You Know Who who said "The easy money is the first 50% move off the bottom"

    I sincerely hope Sarah Palin and running mate Joe the Plumber are the front runners coming into the 2012 elections. Then I can get back in with the S&P; around 700 again.

  7. I agree, Laura. Thanks.

    To the first Anonymous, does Schwab's Streetsmart software trailing stops work by using closing prices or intra-day prices? If they're using trailing stops on intra-day prices, you can get stopped-out needlessly and lose profits unnecessarily, due to wider fluctuations, which can often occur intra-day than opening to closing prices, although I'm not a financial planner or broker, so I can't give any kind of financial advice to anyone; I'm just "thinking out loud." I haven't found a brokerage firm, yet, that uses closing prices as their trailing stops, but perhaps this software uses closing prices. If so, how much does it cost, and how cumbersome is it to use? The ones that has been recommended, in the past, seemed expensive, could not support very many positions, and were cumbersome. Thanks.

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