Tag Archives: investment grade corporate bonds

Cartography Corner – November 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of October

Random Length Lumber Futures

We begin with a review of Random Length Lumber Futures (LBX9, LBF0) during October 2019. In our October 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for October are:

  • o M4         447.90
  • o M1         407.70
  • o PMH       393.50
  • o Close      367.10
  • MTrend   364.03
  • M3           363.20
  • M2         357.10             
  • PML        348.10                         
  • M5           316.90

Active traders can use 363.20 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

In our October edition, we anticipated a breakout from consolidation and recognized our ignorance as to which direction by highlighting, “The lumber market has been building energy for the next substantial move for four quarters and four months, respectively.  Relative to our technical methodology, it is a 50-50 proposition as to which direction.”

Figure 1 below displays the daily price action for October 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first eight trading sessions were spent with Lumber oscillating around our isolated pivot level of 363.20.  Longs and shorts were battling to establish a sustained directional move away from equilibrium at MTrend: 364.03. 

Astute readers will notice that the low price of the month was realized at the price of 357.50.  That price was four ticks above October’s M2 level of 357.10.  M2 was the first monthly support level under our isolated pivot.

The following seven trading sessions were spent with Lumber making an assault upon, and settling above, September’s high at PMH: 393.50.  The final eight trading sessions saw Lumber achieve and exceed our isolated resistance level at M1: 407.70.

Conservatively, active traders following our analysis had the opportunity to capture most of the trade up which equated to an approximate 10.5% profit. 

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during October 2019.  In our October 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for October are:

  • M4                 3275.75
  • M1                 3037.25
  • M3                 3032.25
  • PMH              3025.75
  • M2               3002.25      
  • Close             2978.50
  • MTrend         2952.81     
  • PML               2889.00     
  • M5                2763.75

Active traders can use 3037.25 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 2952.81 as the downside pivot, whereby they maintain a flat or short position below that level.

Figure 2 below displays the daily price action for October 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  We commented in October, “… the slope of the Weekly Trend could be in the initial stage of forming a rounded top.”  The first two- and one-half trading sessions of October saw the market price descend 123.50 points from September’s settlement price.  The decline accelerated once it settled below our isolated pivot level at MTrend: 2952.81.

The low price for the month was realized (early in the session) on Thursday, October 3rd at the price of 2855.00.  Please pay attention to the commentary that follows next, as it highlights the importance of our multi-time-period analysis.  The Weekly Downside Exhaustion level for the week of September 30th was at W5: 2868.00.  Once our Weekly Downside Exhaustion level was reached, we were immediately anticipating a two-week high to occur over the following four to six weeks.  This was reason one to cover any shorts.  Quarterly Trend for the fourth quarter of 2019 resides at 2840.92.  As we have communicated before, this is the most important level in our analysis and, at a minimum, we expect Quarterly Trend to be defended vigorously on the first approach.  This was reason two to cover any shorts.  By the time of the market’s close on October 3rd, the price had rotated back above September’s low price at PML: 2889.00.  The following five trading sessions were spent with the market price oscillating between MTrend: 2952.81, now acting as resistance, and support at PML: 2889.00.

On October 11th, the market price ascended above and settled above MTrend: 2952.81.  This afforded the market the opportunity to make an assault on our next isolated resistance level at M2: 3002.25.  Two trading sessions later, on October 15th, the market price achieved a high price of 3003.25.  This is notable because it achieved the two-week high that we were anticipating from October 3rd.   The following five trading sessions were spent with the market price oscillating around our isolated resistance level at M2: 3002.25.

On October 23rd, the market price settled above M2 and began its final ascent into the October 30th FOMC meeting.  It is worth noting that the market did not settle above our isolated upside pivot level at 3037.25 prior to October 30thWith one trading session remaining in October, common sense suggested waiting for November’s analysis to be produced in lieu of committing capital on the day of the FOMC meeting.

Humbly offered, our analysis captured the trade down early in the month, the rally into the pre-FOMC high, and the significant pivots in between.

Figure 2:

November 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESZ9).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend             3038.39       
  • Current Settle         3035.75
  • Weekly Trend         2980.58       
  • Monthly Trend        2950.42       
  • Quarterly Trend      2840.92

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three quarters.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures have been “Trend Up” for five months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three weeks.  The relative positioning of the Trend Levels is bullishly aligned.  The market price is above all of them (with exception of Daily Trend) which is bullish as well.

In the monthly time-period, the “signal” was given in August 2019 to anticipate a two-month high within the following four to six months.  That two-month high was realized in October 2019, with the trade above 3025.75.

 

Support/Resistance:

In isolation, monthly support and resistance levels for November are:

  • M4                 3221.00
  • M3                 3093.00
  • M1                 3084.25
  • PMH              3055.00
  • Close             3035.75     
  • MTrend         2950.42
  • PML               2855.00     
  • M2                 2821.00    
  • M5                2684.25

Active traders can use 3055.00 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 2950.42 as the downside pivot, whereby they maintain a flat or short position below that level.

New Zealand Dollar Futures

For the month of November, we focus on New Zealand Dollar Futures (“Kiwi”).  We provide a monthly time-period analysis of 6NZ9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Quarterly Trend    0.6640           
  • Current Settle       0.6416
  • Daily Trend           0.6382           
  • Monthly Trend      0.6361           
  • Weekly Trend        0.6354

As can be seen in the quarterly chart below, Kiwi is in “Consolidation”.  Stepping down one time-period, the monthly chart shows that Kiwi has been “Trend Down” for four months.  Stepping down to the weekly time-period, the chart shows that Kiwi has been “Trend Up” for three weeks.

In the monthly time-period, the “signal” was given in August 2019 to anticipate a two-month high within the following four to six months.  That two-month high can be realized in November 2019 with a trade above 0.6462.

Our first priority in performing technical analysis is to identify the beginning of a new trend, the reversal of an existing trend, or a consolidation area.  With that in mind, we chose to focus on Kiwi for the month of November.  Since its peak in 2Q2017, Kiwi has traded down in five of the previous eight quarters.  In the calendar year 2019, it has only traded up in three months out of ten.  But something caught our attention… Monthly Trend for November has “quietly tiptoed” beneath the market.  In our judgment, the risk-reward is favorable for anticipating a trend reversal.    

Support/Resistance:

In isolation, monthly support and resistance levels for November are:

  • M4         0.6627
  • M3         0.6558
  • PMH       0.6444
  • M1         0.6426
  • Close       0.6416
  • MTrend   0.6361
  • PML        0.6215             
  • M2         0.6169                         
  • M5           0.5968

Active traders can use 0.6361 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

 

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Cartography Corner – October 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of September

U.S. Treasury Bond Futures

We begin with a review of U.S. Treasury Bond Futures (USZ9) during September 2019. In our September 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for September are:

  • M4         181-00
  • M1         176-26
  • M3         174-29
  • PMH       166-30
  • Close        165-08
  • MTrend    157-17
  • M2         157-02             
  • PML        154-31                          
  • M5            152-28

Active traders can use 166-30 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

In our September edition, we anticipated weakness and cautioned, “Short-time-period-focused market participants. . . Caveat Emptor.”  Figure 1 below displays the daily price action for September 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first nine trading sessions were spent with bonds descending in price by seven points and twenty-two thirty seconds.  Ours was a most timely warning. 

Astute readers will notice that the low price of the month was realized at the price of 157 18/32.  That price was one tick above September’s Monthly Trend level of 157 17/32.  Monthly Trend was also the first monthly support level offered by our analysis.   Another prime example of the importance of Monthly Trend as a significant pivot level.

The final eleven trading sessions were spent with bonds retracing as much as 75% of the initial decline.

Active traders following our analysis had the opportunity to capture the entire trade down, which equated to a $7,687.50 profit per contract.  Once Monthly Trend held, drawing from their understanding of our analysis, they also would have known it was worth using the Monthly Trend to acquire a long position with a well-defined stop in place (clustered support at Monthly Trend / M2) to limit risk.

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during September 2019.  In our September 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for September are:

  • M4                 3073.00
  • PMH              3014.25
  • M1                 2999.00
  • MTrend        2924.92
  • Close            2924.75      
  • M3                 2867.25
  • PML               2775.75     
  • M2                 2596.00    
  • M5                2522.00

Active traders can use 2924.92 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for September 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first nine trading sessions of September saw the market price ascend 101.00 points from August’s settlement price.  The gains accelerated once it settled above our isolated pivot level at MTrend: 2924.92.  The high price for the month was realized on September 13th, the exact same day that the low price in bonds was achieved.       

The purpose of every trading month is to surpass the high or low of the previous trading month.  As can be seen in Figure 2, the high price for August 2019 was at PMH: 3014.25.  The price action exceeded PMH: 3014.25, running the “obvious brothers’” buy-stops in the process.  However, the market did not settle above that level which signaled that it was time for active traders following our analysis to take profits on their purchases.

On September 20th, the market price rotated and settled back below M1: 2999.00, now acting as support.  If active traders following our work had not previously sold their long positions, they should have on that day. The final six sessions of September were spent with the market price declining back towards Monthly Trend.

Active traders following our analysis had the opportunity to capture the initial trade up, which equated to a $4,412.50 profit per contract.

Figure 2:

October 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESZ9).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Weekly Trend         2989.90       
  • Current Settle         2978.50
  • Daily Trend             2974.61       
  • Monthly Trend        2952.81       
  • Quarterly Trend      2840.92

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three quarters.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures have been “Trend Up” for four months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.

Like we commented in August, the slope of the Weekly Trend could be in the initial stage of forming a rounded top.  Also, the market price has settled below Weekly Trend for two consecutive weeks.  Weekly Trend for this week is at 2989.90.  This deserves focus from short time-period-focused market participants.  A trend change in the short time-period is often a precursor to a trend change in the longer time-period(s).  We will watch closely to see if this occurs, bolstering the case for a topping pattern.

Support/Resistance:

In isolation, monthly support and resistance levels for October are:

  • M4                 3275.75
  • M1                 3037.25
  • M3                 3032.25
  • PMH              3025.75
  • M2               3002.25      
  • Close             2978.50
  • MTrend         2952.81     
  • PML               2889.00     
  • M5                2763.75

Active traders can use 3037.25 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 2952.81 as the downside pivot, whereby they maintain a flat or short position below that level.

Random Length Lumber Futures

For the month of October, we focus on Random Length Lumber Futures.  Lumber prices are often seen as an indicator of economic activity due to its widespread use in real estate.  Regardless of whether you may trade lumber, the analysis and price action of lumber may provide some clues as to the future direction of the economy.  We provide a monthly time-period analysis of LBX9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Weekly Trend        376.33          
  • Daily Trend            370.83
  • Current Settle        367.10          
  • Quarterly Trend     366.80          
  • Monthly Trend       364.03

As can be seen in the quarterly chart below, lumber is in “Consolidation”.  Stepping down one time-period, the monthly chart shows that lumber has been “Trend Up” for four months.  Stepping down to the weekly time-period, the chart shows that lumber has been “Trend Up” for three weeks.

In the quarterly time-period, the lumber market realized its last “substantial” price move (lower) in 3Q2018.  It has been consolidating since.  In the monthly time-period, the lumber market realized its last “substantial” price move from February 2019 to May 2019.  It has been consolidating since.  Astute readers will also notice that the current market price is resting just above BOTH Quarterly Trend and Monthly Trend.  The lumber market has been building energy for the next substantial move for four quarters and four months, respectively.  Relative to our technical methodology, it is a 50-50 proposition as to which direction.  As noted earlier, once this direction reveals itself, we may be simultaneously gifted with an indication of the state of the economy.

Support/Resistance:

In isolation, monthly support and resistance levels for October are:

  • M4         447.90
  • M1         407.70
  • PMH       393.50
  • Close      367.10
  • MTrend   364.03
  • M3           363.20
  • M2         357.10             
  • PML        348.10                         
  • M5           316.90

Active traders can use 363.20 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Cartography Corner – September 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


In addition to the normal format in which we review last month’s commentary and present new analysis for the month ahead, we provide you with interesting research on long-term market cycles.

A Review of August

Silver Futures

We begin with a review of Silver Futures (SIU9/SIZ9) during August 2019. In our August 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for August are:

  • M4         18.805
  • M1         17.745
  • M3           17.469
  • PMH       16.685
  • Close        16.405
  • M2           15.265
  • MTrend   15.263             
  • PML          14.915                        
  • M5            14.205

Active traders can use 16.685 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 1 below displays the daily price action for August 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first five trading sessions were spent with silver ascending to and settling above, our isolated pivot level at PMH: 16.685.  Silver’s rally, which began in June, extended significantly in August. 

The following twelve trading sessions were spent with silver consolidating with an upward bias, testing our clustered resistance levels at M3: 17.469 and M1: 17.745.  On August 26th, silver settled above M1: 17.745 and proceeded over the following three trading sessions to test our Monthly Upside Exhaustion level at M4: 18.805.   The high price for August 2019 was achieved on August 29th at 18.760, a difference from M4 of 0.24%.

 Active traders following our analysis had the opportunity to capture a 12.4% profit.

 

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during August 2019.  In our August 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for August are:

  • M4                3330.25
  • M2                3182.25
  • M1                3089.75
  • PMH              3029.50
  • M3               3020.25      
  • Close             2982.25
  • PML               2955.50     
  • M5                 2941.75    
  • MTrend         2897.03

Active traders can use 3029.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for August 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first four trading sessions of August saw the market price collapse 206.50 points from July’s settlement price.  The descent accelerated once our isolated support levels at PML: 2955.50 and M5: 2941.75 were breached.  When August Monthly Trend at MTrend: 2897.03 was breached, the descent accelerated again.      

The remaining trading sessions of August 2019 were spent with the market price oscillating between 2817.00 (roughly) and our isolated support level at M5: 2941.75, now acting as resistance.  As can be seen in Figure 2, there were essentially five swing trades during the remainder of August, three up and two down.  Each swing covered approximately 125 points.

The war between bulls and bears continues with the battles becoming fiercer.

Figure 2:

September 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESU9).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Monthly Trend        2924.92       
  • Current Settle         2924.75
  • Daily Trend             2905.47       
  • Weekly Trend         2884.92       
  • Quarterly Trend      2727.50

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.

We commented in August:

“We would like to point out the slope of the Weekly Trend has been forming a rounded top over the previous three weeks.  Weekly Trend is currently developing at 2996.58 for the week of August 5, 2019.  If that developing level holds (or develops lower), the topping process will be complete (in the weekly time-period) as 2996.58 is lower than this week’s Weekly Trend level of 2999.83.  Also, a weekly settlement this week below 2999.83 will end the current eight-week uptrend.”

The formation of the rounded top in the Weekly Trend was an excellent indicator of the directional turn in the short time period. 

Support/Resistance:

In isolation, monthly support and resistance levels for September are:

  • M4                 3073.00
  • PMH              3014.25
  • M1                 2999.00
  • MTrend        2924.92
  • Close            2924.75      
  • M3                 2867.25
  • PML               2775.75     
  • M2                 2596.00    
  • M5                2522.00

Active traders can use 2924.92 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

U.S. Treasury Bond Futures

For the month of September, we focus on U.S. Treasury Bond Futures (“bonds”).  We provide a monthly time-period analysis of USZ9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend            165-20          
  • Current Settle        165-08
  • Weekly Trend        164-22          
  • Monthly Trend       157-17          
  • Quarterly Trend     147-27

As can be seen in the quarterly chart below, bonds have been “Trend Up” for three quarters.  Stepping down one time-period, the monthly chart also shows that bonds have been “Trend Up” for nine months.  Stepping down to the weekly time-period, the chart shows that bonds have been “Trend Up” for five weeks.

The condition was met in August 2019 that makes us anticipate a two-month low within the next four to six months.  That would be fulfilled with a trade below 152-28 in September 2019.  This is the second “signal” that has been given since this nine-month uptrend began.  The first was given in December 2018 and the two-month low was realized three months later.  In the week of July 29th, the condition was met that made us anticipate a two-week low within the next four to six weeks from that week.  The market is entering the fifth week of that time window and a two-week low can be realized this week with a trade below 162-06.

Like the rounded top highlighted in E-Mini S&P 500 futures in the August 2019 edition of The Cartography Corner, the Weekly Trend in bonds is beginning to take on the same curvature.  Short-time-period-focused market participants. . . Caveat Emptor.

 

Support/Resistance:

In isolation, monthly support and resistance levels for September are:

  • M4         181-00
  • M1         176-26
  • M3         174-29
  • PMH       166-30
  • Close        165-08
  • MTrend    157-17
  • M2         157-02             
  • PML        154-31                          
  • M5            152-28

Active traders can use 166-30 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

 

Equity Cycle, 1799 – 2061

What if the basis of causation in human affairs, economics, and markets is embedded in the law of vibration of nature?  Sound, light, and heat are all forms of vibration.  Sound is energy vibrating at a frequency that the ear can perceive.  Light is energy vibrating at a frequency that the eye can perceive.  Heat is energy that vibrates at a frequency that our internal thermometers can perceive.  Radiation that penetrates the Earth’s atmosphere causes proven psychological changes in people.

My dog barking at 2:30 each afternoon does not cause the mailman to deliver the mail to my house.  However, when my dog barks at 2:30 each afternoon, I can reliably trust that the mail is being delivered.  Similarly, it is not necessary for the market participant to answer in-depth questions of how or why, with regards to causation.  It is only necessary to answer the question of correlation and, if a correlation exists, what are the results?  Market participants of old, including W.D. Gann, Louise McWhirter, Donald Bradley, and others, not only recognized but successfully utilized the law of vibration across many individual markets.

We spent significant time collecting, organizing, and processing planetary data in the identification and construction of the composite equity cycle graphed on the following three pages.  The composite equity cycle is comprised of six individual cycles, each with a different phase, amplitude, and length.  The average cycle length is 13.5 years.

Our data series of the nominal equity index level spans 220 years, with a low value of 2.85 and high value of 26,864.27.  We faced the challenge of how to graphically present this data series in the most aesthetic manner.  We started by graphing lognormal values, but the result did not “tell the story” in a legible way.  We finally were enlightened (thank you, Jack) to present a rolling return.  The benefit of using a rolling return is that the range of values is relatively narrow and presents itself well graphically.  We set the length of the rolling return equal to the average cycle length.

The first graph displays the cycle over the entire time period, 1799 – 2061.

The second graph highlights the peaks in the cycle and how well they line up with peaks in the rolling 13.5Y annualized return in the Dow Jones Industrial Average.  The dashed lines represent anticipated future peaks.

The third graph highlights the troughs in the cycle and how well they line up with troughs in the rolling 13.5Y annualized return in the Dow Jones Industrial Average.  The dashed lines represent anticipated future troughs.

Compelling.

CLICK TO ENLARGE

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Cartography Corner – August 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of July

Investment Grade Corporate Bond ETF    

We begin with a review of the Investment Corporate Bond ETF (LQD) during July 2019. In our July 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for July are:

  • M4         130.59
  • M1         128.04
  • M3           127.91
  • PMH       124.44
  • Close        124.37
  • M2           122.54                
  • MTrend   120.69             
  • PML          120.41                        
  • M5            119.99

Active traders can use 124.44 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 122.54 as the downside pivot, whereby they maintain a flat or short position below it.    

Figure 1 below displays the daily price action for July 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first three trading sessions were spent with LQD challenging and settling above, our isolated upside pivot level at PMH: 124.44.  However, that early strength failed. 

On July 5th the market price gapped lower, rotating back below our isolated upside pivot level.  Over the next seven trading sessions, the market price continued its descent towards our isolated downside pivot level at M2: 122.54.  The low price for July 2019 was achieved on July 16th at 122.71.

Over the following eleven trading sessions, LQD ascended back to our isolated upside pivot level at PMH: 124.44.  Essentially, the entire month was spent in a two-point “range-trade” bounded by our pivot levels. This was partially a result of anticipation of the July 31, 2019 FOMC policy announcement. 

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during July 2019.  In our July 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for July are:

  • M4                3188.50
  • M3                3136.00
  • M1                2977.25
  • PMH              2969.25          
  • Close             2944.25     
  • MTrend        2872.83
  • PML               2728.75     
  • M2                 2707.50    
  • M5                 2496.25

Active traders can use 2977.25 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for July 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first two trading sessions of July saw the market price oscillate above and below our isolated pivot level at M1: 2977.25 intra-session, with the July 2nd settlement above that level  

The remaining trading sessions of July 2019 were spent with the market price oscillating between our isolated pivot level at M1: 2977.25 and our isolated Quarterly resistance level at Q2: 3019.00.  Like LQD, the entire month was spent in a “range-trade” in anticipation of the July 31, 2019 FOMC policy announcement.  In the last two hours of trading after the July 31st FOMC meeting the entire month’s range (essentially) was traversed and held.

Figure 2:


August 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend             3007.42       
  • Weekly Trend         2999.83
  • Current Settle         2982.25       
  • Monthly Trend        2897.03       
  • Quarterly Trend      2727.50

The relative positioning of the Trend Levels, as shown above, is aligned in the most bullish posture possible.  However, our overall characterization of E-Mini S&P 500 Futures is “mixed”, as the market price has fallen below both the Daily Trend and Weekly Trend.  Also, as discussed below, the Weekly Trend appears to be completing a topping process.

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for eight weeks.

We would like to point out the slope of the Weekly Trend has been forming a rounded top over the previous three weeks.  Weekly Trend is currently developing at 2996.58 for the week of August 5, 2019.  If that developing level holds (or develops lower), the topping process will be complete (in the weekly time-period) as 2996.58 is lower than this week’s Weekly Trend level of 2999.83.  Also, a weekly settlement this week below 2999.83 will end the current eight-week uptrend.

Support/Resistance:

In isolation, monthly support and resistance levels for August are:

  • M4                3330.25
  • M2                3182.25
  • M1                3089.75
  • PMH              3029.50
  • M3               3020.25      
  • Close             2982.25
  • PML               2955.50     
  • M5                 2941.75    
  • MTrend         2897.03

Active traders can use 3029.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Silver Futures

For the month of August, we focus on Silver Futures.  We provide a monthly time-period analysis of SIU9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend            16.459          
  • Current Settle        16.405
  • Weekly Trend        15.870          
  • Monthly Trend       15.263          
  • Quarterly Trend     15.173

As can be seen in the quarterly chart below, Silver is in “Consolidation”.  Stepping down one time-period, the monthly chart also shows that Silver is in “Consolidation”.  Stepping down to the weekly time-period, the chart shows that Silver is in “Consolidation”.  Despite the aggressive move higher in price this past month, it is not definitive that this most recent move is not transitory, like the December 2018 – January 2019 experience.  That brief and aggressive move higher in price was immediately followed by a four-month decline that dropped below the December 2018 low price.

The condition was met the week of July 22, 2019 that makes us anticipate a two-week low within the next three to five weeks.  That would be fulfilled with a trade below 15.190 this week.  The condition was met in July 2019 that makes us anticipate a two-month low within the next four to six months.  That would be fulfilled with a trade below 14.570 in August 2019.  In 2Q2019 the condition was met that made us anticipate a two-quarter high within the next four to six quarters.  That was fulfilled with the trade above 16.300 in July 2019.

While Silver certainly had a good month, in our judgment, it has some technical concerns on a weekly and monthly basis to contend with.

Support/Resistance:

In isolation, monthly support and resistance levels for August are:

  • M4         18.805
  • M1         17.745
  • M3           17.469
  • PMH       16.685
  • Close        16.405
  • M2           15.265
  • MTrend   15.263             
  • PML          14.915                        
  • M5            14.205

Active traders can use 16.685 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Cartography Corner – July 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of June

U.S. Dollar Index Futures  

We begin with a review of U.S. Dollar Index Futures during June 2019. In our June 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for June are:

  • M4         100.155
  • M1         98.435
  • PMH        98.260
  • M3           98.131
  • Close        97.666
  • M2            97.255           
  • MTrend  97.119
  • PML          96.810                        
  • M5            95.535

Active traders can use 98.260 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 97.119 as the downside pivot, whereby they maintain a flat or short position below it.

Figure 1 below displays the daily price action for June 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first four trading sessions were spent with U.S. Dollar Index Futures breaching our isolated downside pivot levels at M2: 97.255 and the downside pivot (MTrend): 97.119.  On the fifth trading session, the market price closed below May’s low price at PML: 96.810 and sustained below that level for the following four trading sessions.

On June 14th the market price rotated back above May’s low price and, over the next two trading sessions, tested our isolated support levels at MTrend: 97.119 and M2: 97.255, now acting as resistanceThat test failed.

Over the following four trading sessions, U.S. Dollar Index Futures achieved our downside exhaustion level at M5: 95.535.  The final four trading sessions in June were spent with the market price trading slightly above our downside exhaustion level.

The realized error between our isolated downside exhaustion level at M5: 95.535 and June’s low price equaled 0.18%.    

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during June 2019.  In our June 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for June are:

  • M4                3078.00
  • M1                2966.00
  • PMH             2961.25
  • MTrend        2849.28
  • Close             2752.50     
  • PML               2750.00
  • M2                2655.50     
  • M3                 2556.50    
  • M5                 2543.50

Active traders can use 2750.00 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for June 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first trading session of June saw the market price test our isolated pivot level at PML: 2750.00 intrasession, with the low price for June being realized at 2728.75.  Early weakness was overcome by strength and E-Mini S&P 500 Futures closed higher for the session.  The price action for that day is a good reminder of why market participants should judgmentally emphasize closing levels, relative to upside and downside pivots when initiating positions.  The market price closed within 0.50 points of our isolated pivot, with mechanical shorts suffering a fifty-point loss the following day while those respecting daily closing levels were spared.  

The following four trading sessions were spent with the market price ascending to, and closing above, our first isolated resistance level at MTrend: 2849.28.  The following ten trading sessions saw the market price continue its ascent, with our clustered resistance levels at PMH: 2961.25 and M1: 2966.00 being achieved and slightly exceeded intrasession on June 21stHowever, the market price did not close above those levels.

The final five trading sessions saw the market price pull back from (three sessions) and re-approach (two sessions) our clustered resistance levels.

Figure 2:


July 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Current Settle         2944.25       
  • Daily Trend             2931.61
  • Weekly Trend         2923.12       
  • Monthly Trend        2872.83       
  • Quarterly Trend      2727.50

In our June 2019 edition of The Cartography Corner, we wrote the following:

We would like to bring your attention to two important points with respect to the Trend Levels.  First, the relative positioning of the trend levels is beginning to align in a very bearish manner.  Daily is below Weekly.  Weekly is below Monthly.  The final alignment that would increase our concern further is to have Quarterly at the top of the order.  The second point is that June Monthly Trend rose relative to May Monthly Trend.  The significance of this is that it informs us that there remain many “trapped” longs at prices 3.5% higher than the current settlement price.  May’s weakness introduced significant pressure on them.

What a difference a month’s price action can make.  The relative positioning of the Trend Levels, as shown above, is aligned in the most bullish posture possible.

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down one level in time-period, the monthly chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for four weeks.

Within the context of the market price relative to the trend levels and the relative positioning of the trend levels to one another, technical analysis of E-Mini S&P 500 Futures is bullish.  The need for a two-month high that we highlighted in last month’s commentary was realized in June.

Facts are facts… and the fact is that the market is not sustaining weakness.  It is a trader’s market, prone to swift and violent price swings.  We are not abandoning our idea of being in the time window for a sustained reversal to occur.  However, we are increasing our respect for the possibility of continued strength.

There are two facets of this market that we are certain of:

  1. Energy is building and a large and sustained move is imminent.
  2. Our analysis will accurately identify the landmarks along the way.

Support/Resistance:

In isolation, monthly support and resistance levels for July are:

  • M4                3188.50
  • M3                3136.00
  • M1                2977.25
  • PMH              2969.25
  • Close             2944.25     
  • MTrend        2872.83
  • PML               2728.75     
  • M2                 2707.50    
  • M5                 2496.25

Active traders can use 2977.25 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Investment Grade Corporate Bond ETF

For the month of July, we focus on the Investment Corporate Bond ETF.  We provide a monthly time-period analysis of LQD.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Current Settle        124.37          
  • Daily Trend            123.90
  • Weekly Trend        122.90          
  • Monthly Trend       120.69          
  • Quarterly Trend     117.42

As can be seen in the quarterly chart below, LQD is in “Consolidation”.  Stepping down one time-period, the monthly chart shows that LQD has been “Trend Up” for six months.  Stepping down to the weekly time-period, the chart shows that LQD has been “Trend Up” for seven weeks.

Support/Resistance:

In isolation, monthly support and resistance levels for July are:

  • M4         130.59
  • M1         128.04
  • M3           127.91
  • PMH       124.44
  • Close        124.37
  • M2           122.54
  • MTrend   120.69             
  • PML          120.41                        
  • M5            119.99

Active traders can use 124.44 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 122.54 as the downside pivot, whereby they maintain a flat or short position below it.

Technical analysis of LQD is bullish.  Having said that, there are bearish technical factors to be cognizant of.  The condition was met on a quarterly basis in 1Q2019 that makes us anticipate a two-quarter low within the next three to five quarters.  That can be achieved this quarter with a trade below 112.78.  The condition was also met on a monthly basis in January 2019 that makes us anticipate a two-month low in July.  That can be achieved this month with a trade below 118.29.  Lastly, the condition was met on a weekly basis, the week of May 27th that makes us anticipate a two-week low within the next two weeks.  That can be achieved this week with a trade below 121.62.

Figure 3:

Figure 3 above displays an LQD monthly candlestick chart for the period of January 2005 through June 2019.  Inversely overlaid is the spread between Moody’s Seasoned Baa Corporate Bond Yields and the Bank Prime Rate, measured in basis points.  As Charles Gave explains:

“Artificially depressed prime rates below the natural rate of corporate credit have allowed banks to generate ‘artificial’ money, kept zombie companies alive, but most of all permitted most viable corporations to engage in ‘financial engineering’ such as issuing debt to repurchase stocks, all of which are predicated on cheap borrowing costs continuing indefinitely, the risk, of course, is that the credit-funded party ends once the curve inverts… When the private sector curve inverts, the zombie companies will fail, capital spending will be cut, workers will be laid off, and the economy will move into recession.”

In 2006, the spread reached a trough of -205 basis points.  We believe that the spread today, currently at -103 basis points will not be able to reach the 2006 level.  We also believe the pending market repricing in LQD could be much more exaggerated than the thirty-three-point decline experienced during the Great Financial Crisis.  We ask that you reflect upon the following:

  • In 2006, the Bank Prime Rate equaled 8.25% and Moody’s Seasoned Baa Corporate Bonds yielded 6.20%. Today those levels are 5.50% and 4.47%, respectively.  (Our next step is to normalize the spread relative to rate levels.)
  • The size of the corporate bond market in 2006 totaled $4.9 trillion. As of the end of 2018, it totaled $9.2 trillion.
  • As detailed by Michael Lebowitz in The Corporate Maginot Line, “50% of BBB companies, based solely on leverage, are at levels typically associated with lower rated companies. If 50% of BBB-rated bonds were to get downgraded, it would entail a shift of $1.30 trillion bonds to junk status. To put that into perspective, the entire junk market today is less than $1.25 trillion, and the subprime mortgage market that caused so many problems in 2008 peaked at $1.30 trillion.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription, we are asking you to listen.

The Worst Place To Be For Bond Investors

Last week, Jeffrey Gundlach of DoubleLine Funds noted in a webcast that investment grade corporate bonds are terrible. There is no way to win with them, he said. As much as half the investment grade universe could be downgraded to junk, and that will take buyers out of the market who can’t buy junk bonds. On some basic ratios, Gundlach argued, a lot of investment grade debt should already be rated junk.

Yesterday, DoubleLine Capital Portfolio Manager Monica Erickson was quoted in a Reuters piece arguing similarly that the investment grade corporate bond market is the worst place to be for bond investors. That part of the market has delivered negative returns this year. For example, the iShares Investment Grade Corporate Bond ETF (LQD) is down 5.50% for the year through November 15. The main investment grade bond index, the Bloomberg Barclay’s US Aggregate Bond Index, is down 2.23% over the same period. This year, investment grade corporates have underperformed lower quality junk bonds.

Interestingly, it’s not that investment grade companies are ready to default, noted Erickson. It’s that the starting yield on investment grade corporates is so low that there is a lot of duration risk in them. That risk reflects how soon or long it takes for an investor to receive their money back in interest and principal payments. If interest rates increase, bonds with higher durations (fewer payments coming back to the investor sooner) suffer more because it takes an investor longer to receive their money back and invest in new prevailing higher rates.

In addition to the higher-than-usual duration risk, investment grade corporates are yielding less over comparable Treasuries than they have previously. Echoing Gundlach’s point, Erickson said BBB-rated (the lowest rung of investment grade) bonds had increased from 20% of the investment grade universe in 2008 to 50% of the universe today. In a downturn, bonds moving from BBB to BB may not find buyers easily since many institutions have prohibitions against owning junk bonds. The BBB-rated universe is around $3 trillion, while the entire junk bond universe is a little over $1 trillion.

The Reuters article said that Erickson favored bank loans over investment grade corporates, since bank loans have a floating rate feature. But they aren’t foolproof either because of their extra dollop of credit risk.

Investors should have a handle on their bond allocations. It may not be a bad time to overweight Treasuries.

Please click here if you have questions about how we manage bond portfolios.

Are Corporate Bonds Worth The Risk?

Reprint of my latest article for Citywire —-

What are the benefits of adding exposure to investment grade corporate bonds (IGCs) in a stock and bond portfolio?

It may sound like a simple – possibly even stupid – question, but new research suggests that IGCs might not be all they’re cracked up to be. You might even be better off sticking with plain old Treasurys.

The conventional wisdom is that IGCs should improve a portfolio’s volatility-adjusted returns. After all, corporate bonds typically have higher coupons than government bonds without having completely similar trading patterns.

Unfortunately, according to recent research by Jared Kizer of Buckingham Asset Management, the yield premium of IGCs over government bonds doesn’t add much at all to the risk-adjusted returns of a stock-and-government bond portfolio.

In a new paper, Kizer has found that the supposedly attractive premium is based on the historical numbers of the early part of one data set when, especially during the Great Depression, significant credit stress delivered high returns to investors for very highly rated corporate bonds.

Kizer went on to question the veracity of that early data, showing that in later periods – the past 50 years – corporates haven’t added risk-adjusted benefits to performance. We will come back to that dodgy dataset shortly, but for now let’s focus on the past half century.

Examining the period from 1969 to October 2017 using Ibbotson data spliced with some from Bloomberg, Kizer found a compounded return premium of IGCs over government bonds of 1.1% per year. By itself, that is statistically significant. However, Kizer also found that the return premium can be explained by different equity factors, including size, value, momentum and others.

Then, using just the Bloomberg data from 1973 to October 2017, Kizer identified an IGC premium that isn’t statistically significant even before accounting for the equity factors. Basically, adding corporate bonds to a portfolio of stocks and government bonds adds nothing to the volatility-adjusted returns of those portfolios.

Next, as he did in a different piece of research into the diversification benefits of real estate investment trusts with Sean Grover, Kizer tried to replicate the performance of IGCs in portfolios constructed without them. Using four simple portfolios of capitalization-weighted stock indices and government bonds, Kizer found that he was able to replicate the performance characteristics of corporate bonds, concluding that ‘corporate bonds are redundant in portfolios that own stocks and government bonds.’

Misdirected affection

But if this is so, why have others thought that corporate bonds added diversification?

A previous research paper by Attakrit Asvanunt and Scott Richardson touted the benefits of IGCs, but as Kizer explained, the evidence that Asvanunt and Richardson marshalled was unduly influenced by the period around the Great Depression, when corporate bonds might have added diversification. Kizer also doubted the accuracy of some of the early period data.

Specifically, Kizer found a significantly higher Sharpe ratio for the IGC premium compared with either equities or interest rate risk during the period encompassing the Great Depression. Anomalous high returns during the 1930s, a period of significant credit stress and an IGC premium in excess of 2.5% per year in this early period for an index focused on AA and AAA corporate bonds resulted in an IGC premium that seems to be completely disconnected from the frequency of corporate bond defaults.

Directing his analysis to the period between 1930 and 1968 in the Ibbotson data, Kizer found that the IGC premium for that period was ‘more than two times higher than market premium and almost five times higher than the term premium over the pre-1969 period.’ The IGC premium itself was 2.6 % per year, which is high considering that the Ibbotson data is oriented toward the highest quality (AA and AAA) corporate bonds. What’s more, Kizer found that the Sharpe ratio of the IGC premium was well in excess of one in the 1930s and 1940s, but never one or higher in any other decade through 2009. The IGC premium had the highest risk-adjusted returns in three of the four
early-period decades.

Dodgy data

All of this is suspicious because default rates were highest in the 1930s, according to Moody’s data. Somehow, the IGC premium was highest when defaults were highest. Moody’s also reports almost no corporate defaults from the early 1940s through the 1960s, meaning that one might expect the 1940s to have produced a higher IGC premium than the 1930s. Although Kizer wasn’t sure, he suspected that the early data tracked bonds that were rated AAA or AA, but then dropped them if they were downgraded or if they defaulted. That means that their poor performance might not have been accounted for accurately.

The upshot for investors is that adding a permanent allocation of investment grade corporate bonds to a portfolio of stocks and government bonds does not increase that portfolio’s risk-adjusted returns. Kizer did allow for the fact that it might be possible to add corporate bonds opportunistically, or when spreads are relatively wide, reducing exposure to them again when spreads contract. This could theoretically enhance a portfolio’s risk-adjusted returns.

Of course, just as we might be living in a period of higher equity valuations, we might also be living in a period of tighter spreads. That would make such an operation difficult to execute and perhaps not worth the risk premium – or the lack thereof.