Head Fake

Reader Pat had this recent experience:

Look forward to your weekly e-mails.

Last Friday’s jobs report showed how sensitive the market is to fear that the Fed will raise rates. It is not an “if” issue, but “when.”

Knowing that the rise is inexorable, what ETFs can be used to capitalize on the rise in rates? I bought TBT with the head fake in rates this last June and LOST big. What is a more prudent way of capitalizing on the inevitable??

First, even if you entered the trade back in June, your loss should have been within reason if you used my recommended sell stop discipline. If you did, you simply experienced a whip saw signal, which nobody likes, but which is part of trend tracking.

Second, whenever you use an ETF on steroids (any ETF with an “ultra” designation) you may have potentially a greater reward but, if you’re wrong, your losses will be magnified.

Third, the direction of interest rates is the big unknown. With the economy being what it is, we won’t see higher rates for some time to come, unless an unforeseen event causes a sudden change.

You did everything correct by reading the TBT’s break above its long-term trend line. Sometimes trends get started and simply fizzle out as you just experienced. There is nothing you can do other than to look for the next opportunity. Just be sure, to keep your losses small via the sell stop discipline.

I have found that breakouts above trend lines, especially in sectors, tend to be fickle and can lead to head fakes occasionally, which means you may have to attempt a purchase several times before you catch the main direction.

As is the case with all investing endeavors, it takes patience, consistency and unemotional decision making to come out ahead in the long term.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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