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This Leveraged ETF Could Pop 20% as the Fed Begins to Taper

The Fed has spoken, and the market is reacting decisively.

Stocks, bonds and gold were down big immediately following the release of Wednesday's FOMC statement, and that selling continued in aggressive fashion on Thursday.

As the Fed's statement was released, I thought it was just slightly more hawkish than the market had anticipated. The real hawkishness, however, came during Chairman Ben Bernanke's press conference, where he basically said that the consensus at the central bank was for "tapering" of quantitative easing to begin later this year. He also said that quantitative easing would likely come to an end by mid-2014.

I think the latter statement was what really made traders nervous, and hence the selling nearly across the board. Interestingly, I suspect that there was another, more personal, read by the markets on Mr. Bernanke that also factors into the selling. After having watched him cope with the fiscal turmoil we've seen during the past five years, I thought his Q&A appearance had a decidedly nervous and shaky tone that's been largely absent in previous pressers.

Here's the brilliant way my friend Tom Essaye of The 7:00's Report described the chairman's presentation: "He sounded like a boss who had to tell his employees that management had decided to suspend raises this year. So, in an effort to soften the reality, he would follow every piece of disappointment with some hedging statement like, 'This salary freeze is only temporary, and it's for the good of the company.'"

In fairness, I can't really think of a job more difficult than trying to inject just the right amount of QE into the system, no more, no less. The Fed is bound to get it wrong, and I think Mr. Bernanke knows that too. Still, this was the first time that I saw (and I'm not the only one) the chairman display a lack of confidence about the steps the Fed was taking. In fact, it was the first time that he actually appeared to be nervous about what he was saying and what was being done.

However Mr. Bernanke appeared, and whichever way his personal psychology leans, the bottom line here is that rising bond yields are likely here to stay, at least through the remainder of the year or until the Fed changes its stance on the tapering issue. As traders, we can take advantage of this situation in numerous ways.

First, we can reduce our exposure to interest-rate sensitive equity positions and so-called "yield proxy" sectors such as REITs, homebuilders, utilities and telecom. Second, we can add a couple of exchange-traded funds (ETFs) to our holdings that will go higher as bond yields rise.

This latter category is where the real money has been made of late, and it's also where the money will continue to be made in the weeks and months to come. My favorite ETF to get on the right side of the Fed-induced rise in bond yields is the ProShares UltraShort 20+ Year Treasury (NYSE: TBT).

This fund is a great way to profit from rising Treasury bond yields, i.e. falling bond prices. That fall has already began and can be seen in the 6% decline in the benchmark iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) in the past month.

TBT is designed to deliver twice the inverse performance of TLT, and over the past month, it has spiked about 12%.

TBT Chart

I suspect that getting long TBT here, which means you are getting short long-term Treasury bond prices, will deliver big profits as bond yields keep climbing due to the prospect of Fed tapering.

Recommended Trade Setup:

-- Buy TBT at the market price
-- Set initial stop-loss at $65.78, approximately 10% below the current price
-- Set initial price target at $87.70 for a potential 20% gain in six months

Of course, there are other rising bond yield funds you can use to get on the right side of the Fed. There's the non-leveraged ProShares Short 20+ Year Treasury (NYSE: TBF), as well as the ProShares Short High Yield (NYSE: SJB). While both of these are good plays when interest rates rise, the leveraged TBT should give traders more bang for their buck.