Let's play a game. Below I have listed six actual
news headlines and I would like you to guess what year they were
written.
1. "Refinance your home now" - Kiplingers.com
2. "Tips for Refinancing your Mortgage" - New York
Times
3. "It's now Literally the Best Time Ever to Refinance Your
Mortgage" - BusinessInsider.com
4. "Mortgages: Why it may be time to refinance Your Loan" - Wall
Street Journal
5. "The Great American Refinancing" - Barrons Magazine
6. "Is Now a Good Time to Refinance" - Smart Money
Magazine
If you answered 2012 for all of them, it would be a perfectly
logical guess, as all of these articles would certainly pertain to
today's environment. But, if you answered 2008, 2009, 2010,
2010, and 2011 you would score perfectly. These headlines are
actually listed in order of appearance by year starting in
2008!
In hindsight, it is obvious that none of the articles are
correct. Just recently on 7/16, the Detroit News reported
that, "30-year mortgage rate drops to lowest level since 1950's,
3.56%". Since that first article above (written in 2008 with
rates around 6.0%), 30 year mortgage rates (ChicagoOptions: ^TYX)
have consistently fallen for four consecutive years, making now
actually the best time in a generation (so far) to refinance.
Unfortunately, the writers of the articles and most mortgage
advisors, brokers, agents, etc have three things working against
them. The first is that they all have inherent conflicts of
interest. The fact is their livelihoods depend on real estate
transactions and home price stability / gains, so they are
obligated to keep the rhetoric positive and encourage
transactions. The second is that they have all fallen victim
to what I will call the "bottom picking trap". It is fun to
try to pick bottoms, but it definitely is not a smart investment
strategy. The popular phrase "catch a falling knife" comes to
mind. The other popular phrase, "the market can stay
irrational longer than you can stay solvent" also comes to
mind. The final item working against these advisors is that
they seemingly aren't using data and charts to their advantage, and
therefore are at a great disadvantage.
The below chart, from the 7/1 ETF Profit Strategy Update shows
the iShares Barclays 20+ Year Treasury Bond ETF (NYSEArca: TLT) at
a price of $125.20 which is a proxy for the 20+ year treasury bond
index. On 7/1 we stated, "we continue to stay long the longer
duration treasury bonds". On 7/3 with the TLT at $125.89 we
reiterated, "This sets up for a nice risk / reward trade for
aggressive buyers" and suggested a stop location as well.
Today TLT is at $129.78 and at a very important price
level.
Right now as the Detroit News headline above shows, 30 year
mortgage rates are at their lowest levels in a generation, but that
doesn't mean a bottom is here and that today is the last
opportunity ever! Learn from the mistakes made by the writers
above: Just because rates and prices are at extremes, does not mean
they can't become even more extreme.
At ETFguide we prefer not to try to catch falling knives, but
instead use technicals and data-driven analysis to identify where
markets are headed. The difference between a 6.0% and a 3.5%
30 year mortgage is massive and many homeowners would have
benefited by waiting until now (or still later) to refinance.
When a trend change in bonds does actually occur, we will be ready
for it, but for now there is no reason to think a bottom in yields
is here.
ETFs
that take advantage of a continued downtrend in long term bond
rates are the ProShares Ultra 20+ Year Treasury (NYSEArca: UBT) and
the SPDR Barclays Capital Long Term Treasury (NYSEArca: TLO).
To capitalize on a trend change in long term government bonds
and mortgages when it does come, ETFs such as the ProShares
UltraShort 20+ Year Treasury (NYSEArca: TBT) and the unlevered
version (NYSEArca: TBF) can be utilized. ETFs that follow the
mortgage market include the iShares Barclays MBS Bond (NYSEArca:
MBB) and the iShares FTSE NAREIT Index (NYSEArca: REM).
Today, there is no need to rush into refinancing as the trend in
bond and mortgage yields is still down (as it has been for
years). The
ETF
Profit Strategy Newsletter
provides comprehensive technical analysis along with practical and
actionable commentary across many asset classes to help keep
investors on the right side of the market and stay ahead of any
coming trend changes.