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December 23, 2013 at 07:00 PM
Each New Year brings its own financial rhythm or what we call “market trends.” These are the movements in financial markets that will shape future winners and losers.
Ascertaining major trends before they become readily apparent to the rest of the world is a craft that makes successful investing such a challenge. Remembering history is helpful, but history won’t tell us how the future will necessarily happen.
Figuring out what will become this year’s major investment developments requires observation, respect for history, a keen understanding of world events and a fair dosage of gut instinct. Being ready for these themes through actionable ETF investments is how advisors can help their clients to profit.
Let’s examine what could turn out to be some of 2014’s biggest and most important investment themes.
Rates March Higher
The bond market bubble has popped and investors that piled into long-term bonds chasing yield are paying dearly. When bond yields rise, bond prices fall. And long-term bonds, because of their sensitivity to rising rates, have fallen the hardest. The iShares Barclays 20+Yr Treasury ETF (TLT) has declined 12.75% over the past two years.
There’s good reason to believe this trend will continue, especially as the Federal Reserve begins to scale back its $85 billion monthly purchases of U.S. Treasuries, also known as “quantitative easing” (QE). It’s doubtful foreigners will pick up the slack in Treasury bond purchases once the Fed exits. Interestingly, bond yields have still climbed despite the Fed’s continuation of QE.
Conversely, ETFs that gain from falling bond prices like the Direxion Daily 20+ Yr. Treasury Bear 3x Shares (TMV) and the ProShares UltraShort 2x 20+ Yr. Treasury ETF (TBT) have been strong gainers, rising between 27% to 37% over the past year. These funds use daily leverage of 300% and 200% and are designed to increase in value when bond prices fall.
More gains for TMV and TBT are ahead if the yield on 30-year U.S. Treasuries dances with 4%.
Metals Capitulate
Gold has historically had long periods of boom and bust. After peaking around $850/oz. in 1980, gold spent the next two decades doing nothing. That was the bust.
In 2000, gold began a long boom of 12 consecutive yearly gains—an impressive streak which came to an end in 2013. But this latest boom has been masked by a nasty bear market that began two years ago in precious metals.
Since 2011 peaks, the SPDR Gold Shares (GLD) has fallen more than 32% while the iShares Silver Trust (SLV) collapsed more than 53%. The technical trend remains down and only the ETFS Physical Palladium ETF (PALL) has avoided the carnage.
During the course of its 12-year bull market, gold prices fell more than 10% in value seven times and by more than 20% on three occasions. And if gold follows its historical pattern, the next long period of bust could be ahead. That should mean more outperformance for bear ETFs like the ProShares UltraShort Gold ETF (GLL) and the Direxion Daily Gold Miners Bear 3x Shares (DUST).
