MRF Watch

American Income Fund Inc. (MRF) is a textbook example of an income play gone wrong: Love the 8.45% annual dividend yield, hate the 4.2% capital loss so far this month (4 trading days!).

It raises the question: Are income plays even worth playing?

	pps	psar	macd		obv	h-a trend		ma20	ma50	ma200
MRF $8.23

MRF is a closed end fund holding high-yield investment-grade income instruments. In theory, it's safer than sub-investment-grade exchange-traded funds such as JNK, the junk bond etf. But it's main attraction is that it pays dividends monthly, allowing for a more constant income stream and minimizing the ex-dividend-date effect on the price.

On Friday, MRF, broke below the 200-day moving average.

The price is within a long sideways period from last summer, an area that appears to be providing support.

Mid-term, MRF has been on the rise since October 2008. The price pattern is a higher high set last October, and a low that still counts as a higher low -- technically an uptrend.

Long-term, MRF has been on a downtrend since hitting an all-time high in July 1992, with a series of lower high s and lower lows every five years or so. This year's high overshot the prior lower high set in May 2003 by just a bit. I would count it as an anomalous overshoot rather than a true higher high.

Reversal Levels

• $8.81, +7.1% (swing high)
• $8.38, +1.8% (200-day moving average)
• $8.23 --- You are here.
• $8.00, -2.8% (today's low)
• $7.84, -4.7% (swing low)

MRF illustrates the question raised by every income play: Do I focus on the income, or do I focus on the capital gain?

If the capital gain, do treat it as a special case, focusing on the long-term with a buy-and-hold mentality, or do I treat it the way I treat growth stocks, as a short-term play where I watch the signals like a hawk and exit at the least hint of trouble?

I haven't resolved those questions yet in my own thinking.

The broader question is one of whether income plays are worth it. If they are as volatile as growth or value plays, then the dividends are something of a hindrance, since they distort the trader's judgment on entry and exit.

With income plays, I have to worry about the dividend calendar, which complicates my decision-making.

MRF has good fundamentals. It resembles a growth stock in many ways. A growth stock that provides 8%+ in income each year is nothing to be sneezed at.

However, good fundamentals are no guarantee of capital gain.

If I exit MRF, it will likely be later in the week, since Monday tends to be a down day in the markets.

Disclaimer

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.

Abbreviations:

• 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.