Are there opportunities in Bonds?

As we start a new year, with the returns in the stock market so flat, some investors may be considering buying bonds if only just for their yield. Is this a good idea? If the idea seems reasonable, what maturity looks the best? Investors should also examine whether or not they should be buying corporate bonds, agency bonds, treasuries, or certificates of deposit. However, for the purposes of this column, I am going to focus on treasury bonds.

First, to address the fundamental question of whether or not increasing one’s allocations towards fixed income is prudent; let’s examine the technical situation of the stock market as it would seem (along with commodities) to be the other alternative. Two-thousand and five did not provide the type of return that I was looking for as the Dow really did seem to get hung up at the 11000 level, in turn, putting a damper on the other indexes. As we start the new trading year, the percent of stocks trading above their 150-day moving average has started to show weakness. This is a medium term measure of stock market price movement, and one in which to pay attention. Also, in conjunction with this breadth indicator, the number of stocks making new highs versus the number of stocks making new lows has also started to slip. So, all in all, for the medium-term at least, things don’t look that great for stocks. Based on that evaluation, fixed income would be a place to put some money. In addition (a fundamental analysis issue), the yield curve has inverted. Historically, this has proved to be a foreshadowing of tougher economic times, and, therefore, negative (or continued flat) stock market returns. And, if that holds true, investors will usually feel a bit better about having an increase allocation towards fixed income.

What maturity should investors buy? This can be a very tricky question, especially considering the inversion. The only way I know how to answer it with any reasonable degree of certainty is to look at all the charts of the iShares that track different maturities. If you would like to do so also, the following are the symbols for the Fixed Income iShares that I examined in order to come up with my conclusion on maturity: (SHY | Quote | Chart | News | PowerRating) (Lehman 1-3 year Treasury Bond Fund), (IEF | Quote | Chart | News | PowerRating) (Lehman 7-10 year Treasury Bond Fund), (TLT | Quote | Chart | News | PowerRating) (Lehman 20+ year Treasury Bond Fund), and (TIP | Quote | Chart | News | PowerRating) (Lehman TIPS Bond Fund). Pictured below is the IEF:

This chart looks the best. Yes, it has seen some decline in price, but not as dramatic as the other fixed income iShares. It is still trading above its’ bullish support line and it also has positive momentum. It has also moved above its 50-day simple moving average and its’ 200-day simple moving average. However, the 200-day is still trading above the 50 day. The yield is currently 3.874%, more than what the S&P 500 returned last year. Price appreciation (meaning rates will go lower for this maturity) is a possibility if the inversion broadens. I suggest that investors buy individual bonds with maturities between 7-10 years. If you want to buy IEF, use a stop of $81.50 (a violation of a double bottom and the break through of bullish support). Another thing I would like to mention briefly, is that if you are scared of how possible inflation may hurt bond prices, pay attention to TIP. You could buy this when it breaks through the resistance that it faces currently.


 

Sara Conway

Sara Conway is a registered representative at a well-known national firm. Her duties involve managing money for affluent individuals on a discretionary basis. Currently, she manages about $150 million using various tools of technical analysis. Mrs. Conway is pursuing her Chartered Market Technician (CMT) designation and is in the final leg of that pursuit. She uses the Point and Figure Method as the basis for most of her investment and trading decisions, and invests based on mostly intermediate and long-term trends. Mrs. Conway graduated magna cum laude from East Carolina University with a BSBA in finance.

candsconway@yahoo.com