The Motley Fool Discussion Boards

Previous Page

Investing/Strategies / Bonds & Fixed Income Investments


Subject:  Charting Bonds and Bond Funds Date:  1/7/2013  10:22 PM
Author:  globalist2013 Number:  34616 of 36613

Mandelbrot argues in The Misbehavior of Markets that pictures are as valuable an analytic tool as equations. The necessary corollary -- in the context of bond investing-- is that pictures are as valuable a tool as financial statement analysis. They’re not just a fast way to get an overview. They are often the only way to answer the third of the Five Essential Questions, namely, “When?” (With the other four being “What?”, “Why?”, “How Much?” and “Exit Point?”)

In other words, to make an investment (or in trader talk, “to put on a position”), you gotta know five things: WHAT? (to buy), WHY? (you’re buying it), WHEN? (you should be buying it), HOW MUCH? (you should be buying relative to your account size), and WHERE TO GET OUT? (when the investment/trade moves against you). Financial Statement Analysis (FSA) can tell you the Whats and Whys of corporate bond investing. But that tool can’t tell you anything useful about the Whens. Nor is FSA of much use in making directional bets on interest-rates. For that, you need charts, and charts are all you need. Figuring out (if you can) why interest-rates are going up, or down, or staying flat is hugely entertaining. But, typically, by the time you’re figured it out (if you do), the market and prices have already made their moves, and you could easily now be on the wrong side of your trade for failing to have seen what a simple picture could have shown you.

Charts have their limitations and faults, just as do X-ray pictures of your bones when you walk into the doctor’s office with a broken hand. But repeated practice develops interpretive skill, and making charts can be a disciplined way of converting ‘data’ into ‘information’. Of the free, charting sites on the web, is one of the best in terms of users being able to create linkable charts. (If the previous link doesn’t work, try this one. But the Worden Brothers website, has its advantages as well that I’ll be getting into in the coming days. The downside is that screenshots have to taken of any chart created and then uploaded to a site like Google Docs.

By way of running a test, here’s the link to a chart made at the Worden Brother’s website and uploaded to Google Docs. The chart is TLT, the ETF that tracks the 20-year Treasury bond. The indicators used don’t much matter. Dozens of others would tell the same story, that prices are headed down, and that money is moving out of the fund. Whether this is just a temporary thing --and hence “noise”-- or a viable “signal” is something can that can be argued, and this where fundamentals do have a role to play. But the picture is clear. The market has rung a warning bell.

Copyright 1996-2019 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us