How To Profit On Both Sides Of Interest Rate Moves

With inflation rearing its head the last couple years, interest rates have captured the attention of stock market investors. The Fed’s aggressive rate tightening may have been necessary to tamp down inflation but it’s not generally positive for stocks. But the use of instruments like the iShares 20+ Year Treasury ETF (TLT) let you use swing trading strategies for moves in bonds and interest rates.

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Swing Trading And Interest Rates

With the use of ETFs, moves in interest rates are easily adapted for swing trading. The ProShares Ultra Short 20+ Year Treasury ETF (TBT) has been a favorite of Swing Trader. By going short on Treasury bonds, you end up trading in the direction of interest rates. The leverage gets you a little bit of an extra boost to returns — or a larger loss if it goes against you. With the rise of interest rates, we added TBT stock three times in 2022 and twice in 2023.

David Saito-Chung talks about the influence of interest rates and sports on the market in this week’s podcast.

But with this latest follow-through day on Nov. 1, the Fed decision to leave rates unchanged seemed to spark the rally. And interest rates fell. Begging the question, was it time for interest rates to go in the other direction? No problem. Just go in the direction of the bonds themselves. In this case we used TLT stock. With this ETF, you trade in the direction of bonds and opposite the direction of interest rates.

Swing Trading Example: TLT Stock

What was the appeal of the recent interest rates trade? A big move to the upside in interest rates in September and October showed up as pressure on TLT stock until its recent bottom (1). When the Nasdaq 100 bottomed on Oct. 26, the treasury wasn’t hitting new lows (2). The relative strength line showed an uptick on the divergence.

When the Nasdaq composite flashed a follow-through day on Nov. 1, we added TLT stock to SwingTrader (3). If interest rates were showing a temporary top, we could get performance by trading in the direction of the treasuries.

We immediately got feedback that the trade was working with a strong gap up in TLT stock the next day (4). Treasuries can move a little slower, especially without leverage. But on Nov. 3, we had a 4% profit and locked in a third on the strong move (5). Taking a little bit off the table can help manage the trade on weakness and get out with a profit. For example, on the day we locked in profit, TLT stock also hit resistance at its 50-day line and reversed. Temporary weakness followed.

When TLT stock burst above its 50-day line we took off another third of profit just to lock in another third on strength (6). When interest rates spiked up a bit the next day, bonds, of course, fell (7). We exited the position as TLT lost its 50-day line again just to be on the safe side. We also had a weak treasury auction, as reported by MarketWatch, and Fed Reserve Chair Powell indicating that more action might be needed to combat inflation.

Since then, TLT stock showed a recovery just below 90 (8) but hasn’t made much progress from there since. Meanwhile, we’ve locked in a quick profit and can move on to another trade.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.

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