The Great Bond Bubble 6/25/12

Exchange Traded bond funds have been in a bubble as the Feds have kept interest rates low to spur growth in the economy. By the time this is all over, it will be another gigantic bubble, no different than the Dutch tulip or housing bubble. So how can I profit from the bursting of the bubble?

Firstly, the simplest way to see how much the bubble has grown is to look at the rising prices of TLT which is the iShares Barclay’s 20 Year Treasury Bond Fund. TLT has climbed from a value of $91 to $126 in two years. Another bond fund, iShares TIP bond fund has climbed from $107 to $121 in the same time period. Clearly bonds have risen much faster than many stock funds and this rise is unsustainable. Flight to safety from international stock funds has inflated our bond funds; combined with the extraordinarily low interest rates that we currently enjoy for borrowing money. So how do I make money when this bubble bursts?

 

One recommendation is to put money back into stock funds as they are usually contrary to bond funds. However my thinking is a little different.  I think it would be better to simply put money into TBF, which is the Pro Shares Short bond fund. TBF behaves opposite to the bond funds and from the attached chart; we can see how far it has dropped in the last couple of years. I would only put money into TBF using timing systems and not based on assumed fundamentals. Those that felt interest rates are low and it is time to put money into TBF would have seen their monies shrink from $45 to $29 in the last two yeqars, quite a significant drop. It is far better to use trading systems to time those entries and take advantage of the rise when the bond market bubble bursts. I think one has to keep in mind that bubbles can last a long time, and one would need to be patient and wait for major turns before inserting too much money into TBF, even with timed systems.

I missed out and lost money on my home value when the housing bubble burst and even though I thought of hedging my home value, I did not. This time I will be ready for the next bubble bursting which I believe could be the bond bubble.

IIF Gives an Up Signal 6/17/12

The India Fund IIF gave an up signal at close of business Friday.

The chart shows the price nudging the 50 day exponential moving average, the red line, and still well below the 200 day exp mov avg black line. I would consider taking a small; long position but keep in mind that many of these trades below the two averages can be short lived. Actually we have no way of knowing how long it will last. As long as one takes all the trades, one would hit pay dirt in a selective fashion, and not have to bear the huge downside losses.

I am mindful that the S&P 500 is still in an exit long signal and is also nudging the 50 day exp mov avg. It has one major difference. The price is above the 200 day exp mov avg, the black line and the 50 day ema is above the 200 day ema. That is still bullish.

With the elections over in Greece this weekend, the conservative party won and the world is relieved for the moment. The Greeks were probably wanted to shed the austerity programs but the fear of the unknown; and what would be the consequence in money devaluation trying to bring back the Drachma currency probably scared people even more. The cycle is not over. There is considerable pain ahead of many countries in Europe; Spain, Italy etc. and perhaps the same awaits us in the US eventually, who really knows? For now the US has certainly lead

Just to be clear, this is not a political forum. All I am looking at is the consequences of these world event decisions through the technical charts and safely navigating our nest egg.

Gold – A Contrarian Approach 6/9/12

Over the last few weeks, I have been doing some back testing using my top 40 trading systems against the market indices like GLD to see which ones rise to the top. The period of time I ran the back test on was from 2007 – 2011. I figured I would view results both short and long and wanted to include the steep 2008 drop in markets as the remarkable 2009 recovery in my analysis.

You would think that an intermediate paced trend following system would do the best, given the steep trends included in the analysis. The results were, I must admit, surprising to say the least. Top of the list consistently was a Contrarian system that I have always been very suspicious of. It is one that goes against the grain of what I like to do. Normally I want to catch a nice trend and follow it to the end.

The contrarian system I have looks for turning points and presumptuously make you take the trade in the opposite direction. At that point GLD could be dropping quickly and the system says go long. It is a system that truly pushes you to buy low and sell high. And if the trade goes wrong, it quickly tells you to exit. Obviously this system could be quite painful to implement in a long and sustained trending market as you would miss much of the long move and would keep trying to trade against the market direction. Sounds like a bad system. Yet the results are surprisingly better than the best

 Test period:  1/3/2007-2/25/2011   1514 days

System                                     Avg Profit Points       Trades   Wins  Losses  Contrarian                                            104                  73          35      38      
72 Simple Mov Avg                               17                   60          23     37

MACD9                                                 5                    80          33     47                   

The above table compares the Contrarian approach with two standard methods. The first is a trend following approach where you go long when the price is above the 72 SMA. The second is the traditional MACD (Moving Average Convergence Diveregence) approach and going long when the MACD crosses its 9 moving average line. Amazingly the Contrarian approach leaves them in the dust.  The 104 points is roughly 130% profit over the 4.25 years as the average price of GLD during that period would be around 80. The points are essential compared to the average price. I expect I would trade this in both long and short direction using options or my dynamic hedge system. 

I think I will have to take a closer look at this system and thoroughly verify these results before I commit my money into it. But it sure looks promising  This is what I enjoy - testing, back testing various methods and narrowing it down to what I want to follow and then using it to manage my portfolio.

Here is the chart of GLD with the Contrarian system applied to it. There are long buy signals with an Up arrow, Short signals with a Down arrow and Exit signals on long and short with a box around it.

401 Monthly Analysis - Yellow light 6/2/12

The monthly analysis I do on my two 401K funds continues to show a cautionary outlook but refuses to fully abandon stock funds. Goes to show how slow the turning momentum is for a monthly analysis. It feels like Rome is burning already based on recency, Friday’s 274 points drop on the Dow and the huge 79 points drop from the Nasdaq.  I felt a slight fear after the losses. VIX, the volatility or fear index is rising and I can feel it in my pores. Fortunately, my portfolio saw a very small loss; and this time my wife said “looks like you were able to hedge the market drop pretty well”. Not too often do I get a compliment like that from the boss… I was expecting a large drop after last week; but the hedges really neutralized the losses.

Can’t help but wonder what JP Morgan Chase was hedging in London and how they lost $3 Billion on a hedge without showing gains on the primary article traded?

In my current employer’s 401K, I am dropping Royce Opportunities and Fidelity Blue Chip growth and going to 50% Fidelity Government Income Fund and 50% Money Market/cash funds. I am still showing Fidelity Blue Chip Growth as a hold but letting my weekly technicals bias me towards getting out of Blue Chip Growth.  I will have to wait a few days and do it later this week so that I get past the Fidelity 30 day hold rule. Also the weekly chart on Royce Opoortunities is very oversold and will probably see a bounce. Not sure if I should hold out for that. These are hard to time and can cause more pain than gain. See charts attached. If one wanted to distribute the stock holdings further, the Fidelity Fund or the Fidelity Puritan Funds would be choices; but for now I will opt for conservatism and get out of these stock funds. The Fidelity Government Income Fund is a nice choice for a Bond fund. See chart attached. It runs in the opposite direction to stock funds. I will be placing my orders this week to make the swap.

As for my previous employer’s 401K funds, I will move from a 65:35 stock: bond fund holding to 50:50. The two funds I will be in for the stock funds will be Mt Vernon Growth and Artisan Mid-Cap Fund (not the Artisan Value). The two Bond funds that I will hold will be PIMCO Real Retn Admin and Fidelity Government Income.

As I look at my methodology, I am going to combine my monthly analysis along with the weekly technical analysis charts like those attached below. I think I can react faster to changing market conditions that way. If the signal is exit on the chart, then I will stay out even if the monthly momentum analysis says stay in. I am a loss shy kind of person and will give up some gains to avoid losses. Keep in mind that stocks drop 2-3 times faster than gain.

I am still hedging my long stock funds with SPY put options in my Rollover IRA. This month, they have certainly helped neutralize my losses. But that is not good enough.

I don’t want to just cut down on losses. I want gains.