Thursday, November 11, 2010

JNK Watch

The SPDR Barclays Capital High Yield Bond Fund ETF (JNK) -- that's junk bonds to you and me -- moved to bear phase on Wednesday, and deepened its bearishness with an intra-day decline today that so far has traversed 0.9%.

ppspsarmacd obvh-a trend ma20ma50ma200
JNK $40.20

JNK is not on my watchlists, but I find it useful in the Morningline as a market indicator, and also as a parking place for cash because of its 8.5% annual dividend, paid monthly.

But, like any high-yield income play, it needs to be watched like a hawk. This is not your grandfather's passbook savings account. With yield comes volatility.

Normally, with an income play like JNK, I give greater credence to signals on the weekly chart. Person's Proprietary Signal on the weekly kicked in with bear phase today, although it is as yet unconfirmed by the weekly on-balance volume.

However, in this instance, the daily signal was enough to prompt me to sell all of my holdings in JNK.

Here's why:

First, for much of this year, corporate high-yield debt (that's JNK) and Treasury long-term debt (that's TLT) have been moving independently of one another. When TLT would decline, JNK would continue the rise that began in March 2009 and that at its peak, on Nov. 4, had risen 61.7%.

However, following the Nov. 4 high, JNK began tracking TLT in decline. That told me something had changed, although I knew not what.

Second, the decline of TLT in itself was strange, in light of the Federal Open Market Committee's decision to buy $6 billion worth of federal long-term bonds. Their intent is to bring long-term interest rates down -- bond prices up -- but the market wasn't anticipating that.

Third, the G-20 countries are clearly rattling their forex sabres over real or perceived devaluation of currency. The outcome is totally uncertain, relying as it does on political decisions by a small group of central bankers and mainly-elected officials.

All in all, the mix of unexpectedness and uncertainty was too great for my taste, so I got out.

On the weekly Person's Chart, JNK has declined to the lower monthly pivot, touched it, and stopped there.

Person's Table
ppspps openupper pivotlower pivot
JNK $40.20 $41.00 nov11 $41.67 +3.7% $40.19 -0.02%

The price decline has blown past the 20-day moving average and the two most recent swing low of $40.59 and $40.23. The next lower is $39.71, set on the third day of a pullback amidst a bull phase on all of my principal signals.

Reversal Levels
  • $41.32, +2.8% (swing high)
  • $40.63, +1.1% (20-day moving average)
  • $40.20 --- You are here.
  • $40.04, -0.4% (50-day moving average)
  • $39.71, -1.2% (swing low)
  • $39.08, -2.8% (200-day moving average

Getting out of JNK isn't a hard decision. The dividend is paid monthly, so the time opportunity cost of exiting is relatively small.

The other hit is the common $8 transaction cost, which works out, round trip, to a bit more than half of one month's dividend. Given the fact that today's open was $20 below Wednesday's close, a $16 charge to protect capital doesn't seem too great a price to pay.

Bottom line. I'll re-open my JNK positions when the signals reverse on the weekly chart -- maybe. But only if I have reached an understanding of what's moving the price.

Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

  • h-a trend - Heikin-Ashi trend.
  • obv - On-Balance Volume.
  • pps - Person's Proprietary Signal.
  • psar - Parabolic Stop and Reverse
  • ma20 - 20-day moving average
  • ma50 - 50-day moving average
  • ma200 - 200-day moving average
  • macd - Moving Average Convergence-Divergence

About the glance: The colors indicate the state of each signal.
  • Signal Section:
    • pps, psar, macd: green for bull mode, red for bear.
  • Confirmation Section:
    • obv: green for uptrending, red for downtrending.
    • h-a trend: green for uptrending, red for downtrending.
  • Environment Section:
    • ma20, ma50, ma200: green for above the average, red for below the average.

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