In keeping with our macro based theme in a blog post earlier this week, we thought it would be interesting to dive deeper into the fixed income market and take a look at a few other ETF products (other than the TLT) available for exposure within the Tactical Fixed income strategy here at Dorsey Wright. As we stated in a recent post, due to the large size of the fixed income markets, major technical developments in this asset class should not be overlooked as it can have an effect on asset allocation shifts during heavy re-balancing periods such as quarter end.
Recall previously how we noted the residing strength of the US Dollar over the last 5 weeks, which in turn has seemed to help contribute to the lackluster performance in commodities We also noted the TLT (iShares Barclays 20+ Year Treasury Bond Fund) attempting to hold a longer term uptrend line near the 113.00 level. In diving a bit deeper into the fixed income realm, we will now take a look at the updated point and figure charts for both the iShares Barclays TIPS bond fund (TIP) and the Barclays SPDR Convertible Bond ETF (CWB) to see if any technical developments worth noting are being displayed. Clients of Dorsey Wright can gain exposure to both of these products through the Tactical Fixed Income product, should there relative strength ratings be satisfactory for holding.
iShares Barclays TIPS Bond Fund ETF (Point & Figure)
The first product we will take a look at is the iShares Barclays TIPS Bond Fund ETF (TIP). For those of you not familiar with this product, TIPS stand for Treasury Inflated Protective Security. In other words, unlike traditional fixed income products that typically lose value during periods of rising inflation, the principal on a TIPS product will rise and fall with CPI (consumer price index) readings.
From a technical perspective, the uptrend line which was intact on the point and figure chart of TIP was recently broken to the downside. Furthermore , a double bottom break was also confirmed which has a measured move target of $109.50. It appears (at least for the time being) the stronger US Dollar and lower commodity prices have seemed to tame the markets expectations of seeing higher inflation in the near future. We thought it would be worth pointing out that the labor department released the most recent CPI reading earlier this morning which came in at -0.2%, marking the first decrease since April 2013. Given the technical developments we discussed on the TIP point and figure chart, it appears the price action of the market had been reflecting this decline.
DORSEY Wright currently has no position in TIPS
SPDR Convertible Bond ETF (CWB)
The final product we will take a look at is the SPDR Convertible Bond ETF (CWB). This post will not dive into the details of the convertible bond market, but for a brief introduction a convertible bond is a ‘hybrid’ product of both debt and equity. A convertible bond is typically issued at a discount to the current stock price of a company with a specific conversion price that will allow investors to exchange it for common stock if certain conditions are met. Once the share price climbs above the conversion price, it allows for the exchange to be done. We can see below, the current point & figure set up of this product looks quite different from the TIPS chart we analyzed earlier. The relative strength of this product continues to remain strong in comparison to most others in its space. The CWB is currently a component of the tactical fixed income strategy.
This note serves as a brief follow up to our previous write up about using point and figure charts to monitor market rotation. In going into further analysis of the fixed income market, we can see how relative strength strategies have certainly served the Tactical Fixed Income fund well by staying allocated towards the CWB and minimizing exposure to TIP. As with any other asset class, markets cycles in fixed income will change at some point. However, investors can gain exposure to both products through Dorsey Wright in order to help diversify their fixed income holdings based on the current market environment. Furthermore, point and figure charts can also be used to observe different metrics of the economy (in this case, inflation expectations) when being applied to ETF products such as TIPS. The Dorsey Wright Tactical Fixed income model currently has no allocation towards this product, but does have the ability to gain exposure should inflation expectations start to rise along with the relative strength ranking of the product itself.
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