Recently I was asked why trade a bond fund as the interest rates are so low, interest rates can only go up and the bond fund would go down. Let me qualify this comment as I am paraphrasing what was said to me. This person is a COO for a nice sized company, West Point graduate, and also a graduate from a well known business school and we were discussing the value of bond funds in portfolios.
Technicals allow me to trade stocks and commodities and allow me to protect my portfolio and slowly grow it. Fundamentals will often drive the technicals; but so will world events, news, as well as the latest debacle the company has got into, like the $2Billion + loss in trading at JP Morgan Chase. JPM stock is down well over 10% in a few days; far more than the trading loss would dictate; but then once the fear of uncertainty sets in, the stock continues to be preyed upon by traders. After all, it is not clear what is known and what is hidden by the CEO such as changes in risk measurement tools.
Back to the point I was blogging about… I find that with proper technicals, I know that I can trade all kinds of alternate funds that offer me the chance to offset portfolio losses from my equity holdings that are trading at a different, slower monthly time frame. Stocks had a terrible week as I write this. SPY dropped 4.3% this week. My last posting reiterated the exit on long position on SPY. However I run my 401K analysis on a slower 1/month system and it has been slowly shifting directions towards bond funds; but still weighed more towards equity. With the goal of never having a loss year; I find trades like these on the TLT (ETF Bond fund) help me offset losses and hold on to earlier profits from the run up in equities.
I entered the TLT trade at around $116 and took my exit Friday on a limit order I placed at night the previous day for $124 and change. That was a 6.8% gain in about a month. Not bad for a bond fund, eh? I see that TLT is overbought and I am happy to take the profits off the table. I will consider re-entering TLT when it pulls back some and the rate of change of stochastics bottoms out after the pullback. I don’t think this pullback in the market is over but we are probably due for a bounce soon, and during that time, TLT will pull back. The chart is still showing an up signal for the primary indicator. The minor indicators are saying TLT is overbought and will pullback – see the orange balloons hanging on top of the price bars.
Why trade a bond fund? Because it is often contrarian to equity funds and traders move into it as a flight from risk driving its price up. TLT is a long term ETF and is often seen trading opposite to the direction of the market; but it is best to trade it with technicals on its own. I find the same applies for manufacturing processes. People who are “experts” with a process understand its basic behavior; but to understand the real intricacies and properly control them, one needs to use technicals tools to understand the cause-and-effect relationships so that one knows exactly which knob to turn to make the volume rise and which knob to turn to change the channel. End-of-day chart on TLT attached below as well as the latest chart on SPY showing exit on long signal on April 10th..
Daily chart on TLT
Daily chart on SPY
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