What To Expect From The Markets And ETFs When Interest Rates Rise

“When the next tightening cycle begins, it will not be to throttle an economy that is growing too fast. Instead, it will be to rebalance rates to more reasonable levels. The Economy may be less vulnerable when they begin to tighten, but it will not be too strong. That is a material difference, and the correlation between higher rates and higher market levels witnessed since 1997 will be in jeopardy as a result. I expect that correlation to break,” Thomas Kee Reports From Marketwatch.

Kee goes on to say, “When interest rates begin to increase next time, I expect the economy and the stock market to experience a sustained negative reaction. Instead of the knee jerk negative reaction most have been used to, the opposite may happen instead. Since 1997, the knee jerk down on the heels of a rate hike has been followed by a sustained move higher. This time, the knee jerk could be up, followed by a sustained move lower. Initially, Wall Street may consider a rate hike as a sign of confidence. Soon afterwards, they will realize that it is much more of a burden. Soon after the next tightening cycle begins, expect the correlations referenced above to break, and expect the economy to come under pressure. Translated into market terms, I expect the market to begin to weaken soon after the first round of rate hikes, and then I expect it to get worse. There are a few ways to play this.”

“First, we have been in long positions since February, well before the rebound gained momentum. We are holding a defensive portfolio, but one that is working exactly as it should. The positions include: ProShares UltraShort 20+ Year Treasury ETF (TBT) , ProShares Ultra Gold ETF (UGL) , ProShares Ultra Oil & Gas ETF (DIG) , ProShares Ultra Financials ETF (UYG). These ETFs were specially chosen to take advantage of the move higher we expected, and which we expect to continue for the time being. These were defensive and some of these positions could work even if the Market falls,” Kee Reports.

See His Full Story: HERE

Here are some details on the ETFs mentioned in this article below:

The investment ETF (TBT) seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Barclays Capital 20+ Year U.S. Treasury index. The fund normally invests at least 80% of assets to investments that, in combination, have economic characteristics that are inverse to those of the index. It also typically invests in taking positions in financial instruments, including derivatives that should have similar daily return characteristics as twice the inverse of the index. The fund is nondiversified.

TOP 10 HOLDINGS ( 7.38% OF TOTAL ASSETS)  
Company Symbol % Assets
20 Year Treasury Swap N/A 5.07
20+ Treasury Swap N/A 1.55
Proshares Ultrashort L B N/A 0.75
20 Year Treasury Swaps N/A 0.01

Chart for UltraShort 20+ Year Treasury ProShares (TBT)

The investment ETF (UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.

TOP 10 HOLDINGS ( 5.27% OF TOTAL ASSETS)  
Company Symbol % Assets
GCG0 Future N/A 5.27

Chart for Ultra Gold ProShares (UGL)

The investment ETF (DIG) seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones U.S. Oil & Gas index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is nondiversified.

TOP 10 HOLDINGS ( 52.33% OF TOTAL ASSETS)  
Company Symbol % Assets
Exxon Mobil Corporation Common (XOM) 18.38
Chevron Corporation Common Stoc (CVX) 8.69
Djusen Swaps N/A 5.99
Schlumberger N.V. Common Stock (SLB) 4.54
Occidental Petroleum Corporatio (OXY) 3.81
ConocoPhillips Common Stock (COP) 3.75
Apache Corporation Common Stock (APA) 1.98
Anadarko Petroleum Corporation (APC) 1.88
Devon Energy Corporation Common (DVN) 1.69
Transocean Ltd (Switzerland) Co (RIG) 1.62

Chart for Ultra Oil & Gas ProShares (DIG)

The investment ETF (UYG) seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones U.S. Financials index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is nondiversified.

TOP 10 HOLDINGS ( 32.82% OF TOTAL ASSETS)  
Company Symbol % Assets
J.P. Morgan Chase & Co. N/A 6.46
Wells Fargo & Company Common St (WFC) 5.88
Bank of America Corporation Com (BAC) 5.54
Djusfn Swaps N/A 4.06
Citigroup, Inc. Common Stock (C) 2.89
Goldman Sachs Group, Inc. (The) (GS) 2.71
U.S. Bancorp Common Stock (USB) 2.02
American Express Company Common (AXP) 1.67
Visa Inc. Visa Inc. (V) 1.59

Chart for Ultra Financials ProShares (UYG)

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