David Gillie is a Contributing Editor and subscriber to the ETF Digest.
He has been an Engineering Consultant for multi-million dollar construction claims, President and Founder of Envirospec, Inc. (Robotic Pipeline Inspection Equipment) and owner of David Gillie Woodworking & Design.
He divides his time between Wilmington, North Carolina and Fort Myers, Florida.
For two years, yield hungry investors have chased yield across the bond market. Rising interest rates and a seemingly "easy money" equities market caused bonds to lose favor at the beginning of March.
So far this week, various market miracles "saves" of headlines and Fed speeches haven't been able to sustain the rising upward momentum investors have become accustomed to through the 1st quarter of this year. Friday will mark the end of the quarter and fund managers with stellar reports (and fees) are unlikely to leave profits on the table. They'll need somewhere to park money waiting for the next end-of-quarter run up or miracle such as QE. Corporate bonds with a 4.26% dividend would be a logical holding tank.
iShares iBoxx Invest Grade Corp Bond (LQD) offers one of the best yields available for investment grade corporate bonds.
The first statistic I’d like to point out is in the relative volume. While most equities have been trading at 2/3rds or less relative volume, LQD is trading above average volume. Volume is all about conviction and from the upward performance this past week, this indicates buying volume.
A $0.54 average true range on a $166 ETF puts the volatility into a sleepy 0.43% monthly. Granted, you won't wake up rich one morning to discover this position has gone up 14% overnight, but you also aren't likely to see heart stopping drops either.
The top ten holdings of LQD only comprise 5.58% of its total composition. In a bond fund that you want for its stability, holdings spread evenly across its composition is a positive factor. This creates low volatility due to the fact that one or two companies or industries are unlikely to move this ETF unexpectedly.
The current technicals of LQD add to its desirability.
On a low volatility position such as LQD, the slower moving indicators such as the MACD and Directional +/- at the bottom of the chart offer us excellent signals.
The MACD Is nearly a perfect set up. The MACD line is in a rising crossover of the signal line and nearing the median line. The histogram has been rising and just entered positive territory. The +/- Directional indicator at the bottom of the chart shows the bears are in retreat and bulls have taken the field in a bullish crossover.
At the top of the chart both the Relative Strength Index and Money Flow Indicators are rising and have crossed the mid line. Not only does this give us a good directional signal, but also shows follow through on the directional change. At 55 on the MFI and 56 on the RSI, offers significant room to move before have to be concerned with being overbought.
There are some words of caution with LQD, however. A strong upper trend line has been developed. It is unlikely to reach this resistance within the next couple months, but you'll need to keep an eye on it for profit-taking at that level. Also, even though LQD holds corporate bonds, by its nature of an ETF traded intraday, it is still an equity. And as we saw, when bonds lose favor or fund manager need window dressing at the end of the quarter, we can see significant selling.
Rising interest rates cause bond funds to lose favor. We are currently seeing the 10 year T-bill coming off its recent highs and the Fed indicates "accommodating" policies (low interest rates) well in to next year.
An easy way to keep an eye on the fundamentals of this ETF is a glance at the directional movement of the 10 year T-bill.
LQD is giving us a buy signal as a position of caution in an uneasy market.
Disclosure: At the time of writing, I have no position in LQD.