Because global equity markets declined further yesterday, I’m taking a close look at my collection of “risk on / risk off” charts. What are these?
Well, I have about 50 symbols I monitor for potential shifts in the market. These 50 symbols are broken into two categories – “risk on” and “risk off.”
As the names suggest, symbols on my “risk on” watch-list typically outperform market averages during risk on periods – when investors are willing to take on risk. These include the small-cap-focused Russell 2000 (IWM), bank stocks (KBE) and a copper fund (JJC), among others.
My “risk off” watch-list includes tickers that traditionally outperform in risk off environments – when investors have turned cautious. These include bond funds (BND) and metals (GLD).
I scan all 50 symbols looking for trends. If I see all the risk on symbols losing strength, and the risk off symbols gaining strength, I can get a sense of the cyclical shift taking place. And that’s essentially what I see happening now.
Bond funds, in particular, have surged since the equity markets topped out in mid-September.
Here’s a chart of the Nuveen Build America Bond Fund (NBB). This should look familiar to Boom & Bust subscribers. We recommended buying NBB in 2011 and closed it out this year for a nice profit.
This bond fund has been in a strong uptrend since the beginning of 2011. I’ve drawn a simple trend line connecting significant lows. I’ve also color-coded the price bars to indicate different market phases. Green is the most bullish phase and blue represents a pullback, or dip, in a bullish market.
Since August this year, NBB has been an underperformer. This makes sense as the “risk on” environment has dominated since July. The Russell 2000 (IWM) gained more than 7% from July 1 to September 14. During the same period, NBB lost about 4%.
But shortly after the Fed’s mid-September meeting, that trend reversed. Equity markets have moved lower and fixed-income vehicles are heading higher.
Just two days ago, NBB emerged out of the pullback phase and is back into the strongest full-bull phase.
Whether you’re a believer in fixed-income (NBB pays a nice 6% annual yield) or you’re a long equity investor looking for a useful hedge, now is a good time to look at buying into this bond fund.
With solid support at $21, I see much more upside potential than downside risk in this fund. A potential trade setup would be:
Buy NBB up to $21.50 with a Stop Loss order at $20.80. Reasonable profit target levels would be $22.90 (two times the amount risked) and $23.60 (three times the amount risked).
If you haven’t done so already read the Survive & Prosper issue on “Who Wins from Deflation?”
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