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.

Where is Ford headed? 5/26/12

I spent several years working with people from Ford and Visteon and have mixed feelings about the company. One thing is for sure, the people were smart, intelligent and hard working. It did not matter whether they were tall or short, black or white or brown, male or female, old or young. Many were from top schools but many were not. It was hard for me to see so many of them lose so much of their retirement wealth through losses in their 401K when tools from technical analysis could have kept them out of trouble.

I remember volunteering for an evening business school class at Ford where we had a rapt audience with many questions and strong interest.

So I wondered where I see F heading next.

The chart current points downwards. Let me be very clear. That means I would not own F stock just right now. The exit signal occurred around 2/24/12 around $12.27 stock price and it has dropped since then to the current price of $10.60. That is a drop of 13.3% in a few months.

Fundamentally on the positive side, F looks promising as the price of oil has been dropping steadily although gas prices have not dropped as much. Perhaps after the Memorial Day weekend we will see further drops. Lower gas prices seem to encourage car buyers. Ford is profitable and also has taken a move to reduce its indebtedness. Thought I saw where their rating had been raised recently. Yet the charts could run a course similar to what happened in July 2011 where it bounced up and then dropped precipitously.  The Koreans are doing very well and Hyundai/Kia a strong competitor.  Companies like Honda and Toyota are also coming back strongly. It would be much safer to be exited on F right now and wait for a technical entry signal. We may see weakness in the markets from the Euro crisis and since many European countries is in a recessionary mode. High unemployment does not favor car buying. The last technical entry signal yielded a 15% return and although I participated in that, I did not do as well as a friend of mine from Ford who rolled his entire Ford 401K in that move and enjoyed a nice 15%+ move upward. He went to cash for the rest the year till date. I know he is patiently waiting for the next upward move signal. Too much risk for me; but risk and reward are tied and one can argue that going in whole hog for a short while and then exiting the market may very well be a safer strategy then being in there all the time or most of the time and being exposed to the vagaries of the market.

I have thought about starting a subscription service for stocks where I would send signals to the subscribers and they would take the responsibility of acting on the signals and keep charge of their accounts. If someone had followed the signals generated from the F chart, they would have done much better than running a 401k without this guidance. Maybe one of these days…

Why Trade a Bond Fund? 5/19/12

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 10^th..

Daily chart on TLT

Daily chart on SPY

Spy is still Exit on Long 5/12/12

No change on SPY. It is still showing an exit on long, and my portfolio is gradually withdrawing from its previous highs, despite the hedges. It would have been a much sharper pull back without the hedge; but I still don’t like it. I had tried to sell a vertical spread call on CAT when I got the last down signal on it; but it was a limit order and did not take. I would be better off doing a market order when I want to take a position. I place these orders on the weekend or at night and do not track it through the day as I have a day job and do not want a conflict with it. I want to follow my systems end-of-day or end-of-month. The 401K is of course slower being once per month analysis and decision.

I am attaching the chart on SPY below

The next thing I want to think about is looking at doing some credit spreads to generate some income based on directional strategies. I still want to look at a faster system that is small risk but it has to be directional and fluid.