The premise of this post is simple. You buy bonds to make an investment. You buy ETFs to do a trade. As I have been whining for over three years now, the low-hanging fruit is gone if you’re trying to buy fixed-income assets at a sufficient discount to intrinsic-value to create a margin of safety. This isn’t to say that new money can’t still be put to work in individual bonds. But the game has changed, and now it’s become time to act like a trader --instead of an investor -- meaning, if you put on a position (on either market side), be ready to exit fast. That means you need tight spreads, good liquidity, and hard stops, all based on a technical game plan. Yes, fundamentals will always trump technicals. But that’s not the kind of market we’re in, nor the time-frame we’re now dealing with. Now, the game is “Shoot first, and ask questions later.” Prices (stocks, bonds, whatever) are being driven by the market’s knee-jerk reactions to the policy du jour. In short, now is the time to use ETFs, rather than individual bonds, to make your bets. (And ‘investing’ is nothing but a betting game in which you’re trying to put in your favor the odds of gaining more money than your risk.) In no special order, and without prejudice or recommendation, I’m going to grind through the hundred or so some fixed-income ETFs there are and try to set myself to go long or short at Monday’s opening in whatever seems promising. I’m going to do this post as if I’m making recommendations. But anyone who attempts to trade off of them without vetting them in terms of their own skills set is crazy and deserves all losses they might incur. BKLN is interesting. Its moves are orderly. In short, it seems tradable. http://stockcharts.com/h-sc/ui?s=BKLN&p=D&b=5&g=... What are the striking features of the chart? The double bottom, of course. But there’s some more interesting patterns, namely, the fractals that override the momentum indicators and justify an entry even at this late date, with a possible target of $26.13-$26.50 (Hint: Look up the term ‘Measured Move’ and work out the details.) CWB. Here’s another chart full of fractals, offering a price target of 42, with obvious support levels. http://stockcharts.com/h-sc/ui?s=CWB&p=D&b=5&g=0...HYG/PBH/SJNK/HYLD. As you can see, the four most liquid junk bond ETFs track each and have been showing recent strength versus their more credit-worthy peers (for which AGG is a good enough proxy). http://finance.yahoo.com/echarts?s=HYG+Interactive#symbol=hy... If it were me putting on the trade, I’d sacrifice a bit of liquidity to get a lower entry price and use PHB rather than HYG. http://stockcharts.com/h-sc/ui?s=PHB&p=D&b=5&g=0... HYMB. My bet is that HYMB has seen its top (and is rolling over) but isn’t quite yet a short. http://stockcharts.com/h-sc/ui?s=PHB&p=D&b=5&g=0... This is an instance where the fundamentals are going to be important to making a good bet. "What does that fund own, and why are prices backing off?" You’ve gotta know that before you go long or short on such thin daily volumes. TIP http://stockcharts.com/h-sc/ui?s=TIP&p=D&b=5&g=0... A nice tight channel, right? and a chart that lends itself to drawing trendlines. But, frankly, I wouldn’t trade TIP for TIPS being the POS trash derivatives they are and for not offering better price action than their unencumbered peers. http://finance.yahoo.com/echarts?s=TIP#symbol=tip;range=3m;c... IEI. I wouldn’t mess with IEI for its not offering anything over AGG. http://finance.yahoo.com/echarts?s=IEI#symbol=iei;range=6m;c...VCIT A 3-year Renko chart suggests how extended in price mid-term corporates have become. http://stockcharts.com/h-sc/ui?s=VCIT&p=D&b=5&g=... A 1-year line chart suggests that a top has been put in and that prices are rolling over. http://stockcharts.com/h-sc/ui?s=VCIT&p=D&b=5&g=... TLT/ZROZ/VGLT Vanguard’s fund should be ignored. It tracks TLT closely and is doesn’t have even 5% of the daily volume. http://finance.yahoo.com/echarts?s=TLT#symbol=tlt;range=1y;c... Predictably, ZROZ is the most volatile of the three and --potentially-- the most useful. But it’s thinly traded and would require caution. http://finance.yahoo.com/echarts?s=ZROZ#symbol=zroz;range=5d...EMB/PCY/EMLC/EBND/ALD http://finance.yahoo.com/echarts?s=emb#symbol=emb;range=6m;c... ENB and PCY track each other, with PCY offering a lower-priced entry. Ditto the pair EMLC and EBND. http://finance.yahoo.com/echarts?s=emb#symbol=emb;range=2011... ALD offers some nice moves. http://stockcharts.com/h-sc/ui?s=ALD&p=D&b=5&g=0...OK, there’s a few more fixed-income categories that could be looked at. But if you’ve been following along and opening up charts, you’re probably fatigued by now and ready for a bit of an overview. So let’s do that. Morningstar uses its familiar nine boxes to categorize bond funds. Instead of distinguishing between the two factors of ‘growth vs. value’ and ‘capitalization’ (as they do for stock funds), for fixed-income funds Morningstar uses the factors ‘credit-quality’ and ‘maturity’. But are all nine boxes really necessary? I’d say not. All of bond investing is based on making one of two bets. Either you’re betting on the level/direction of interest-rates, or you’re betting on the level/direction of an issuer’s credit-worthiness. Thus, to cover the field, you need just two funds, the longest-dated fund of the highest credit-quality and the fund that indexes the junkiest bonds. Everything else is just a redundant version of one or the other, which isn’t to say they might not be useful if they offer better liquidity, better pricing, more predictable moves, etc. But those are trading considerations, not structural considerations. They are how the trade could be expressed. But the underlying bet being made is going to be the same. You’re either claiming that interest-rates will go up (or down), or you’re claiming that an issuer will default (or not). In other words, you’re making a forecast, and then you’re betting on that forecast. ETFs are merely an easy means to implement those bets. Charlie
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