BTZ: An income play

Update 5/17/2013: I've closed my position in BTZ. The price dipped below the 10-day price channel on May 1, sending a signal to close the position. I delayed the closure in the hopes, which were met, that the price would retrace upward a bit. But my main motive in getting out now is to free up funds for more productive trades. The share price was a wash, so I'm out only the fees associated with the round trip. BTZ pays monthly dividends, and I stayed long enough to collect two, for a gain of 1.1% during the month I held the shares.

The Blackrock Credit Allocation Income Trust IV (BTZ) broke above its 20-day price channel on Monday, generating a bull signal under the Turtle Trading rules. The fund confirmed the signal today by trading above the $14.15 breakout level.

Blackrock is a closed-end bond and income fund, the sort of symbol that normally doesn't show up on my analytical radar. But it is the best I've got today out of the three symbols that survived my preliminary screening, so I shall press ahead with my analysis. And who knows, I might even end up taking the trade.

This is BTZ's 16th breakout since early 2009, when the broad markets began their recovery from the post-recession crash.

Nine of the 15 prior breakouts profited from capital gains (without considering the monthly dividends), with an average gain of 8.8%. The average loss of the six unsuccessful trades was 2.3%.

The current dividend yield is 6.62% annualized at today's prices.

Putting it together, I find a very attractive package: A dividend yield about triple inflation plus a 6.5% edge of wins for losses.

And keep in mind that the capital gains are per trade, not per year. On average the successful trades have lasted 49 days each, compared to nine days for the unsuccessful ones.

The breakout comes within a slow walk up that began in early October 2011 from $11.20. BTZ has sent six bull signals since the uptrend began, and half were successful for an average yield of 3.7%. Compare that to an average loss of 1% for unsuccessful trades and BTZ still has an upside edge.

The most recent near-term peak was $14.31 on Jan. 23. Classic support and resistance analysis suggests the price has a likelihood of stalling or correcting from that point. (Unless it doesn't -- the caveat that must always accompany the classics.)

BTZ trades 258,000 shares a day on average, putting it in the middle in terms of liquidity among the three symbols that survived my analysis, although the volume range was fairly narrow.

The rejected the most liquid, SSI (391,000 shares), because it had poor odds of success during its current uptrend. The least liquid, PERI (255,000 shares), had a poorly trending chart.

The company that runs BTZ is BlackRock Inc. (BLK), headquartered in New York City. It is the largest investment manager in the worl.

The BTZ fund as of Dec. 31 had 49% of its holdings in investment-grade corporate bonds, 29% in high-yield bonds at 15% in preferred stock. Banking accounted for 17% of holdings, communications 13% and consumer non-cyclical 11%.

Only 18% of assets are rated A or better. The remainder are either unrated (2%) or rated BBB and below.

The fund next goes ex-dividend on April 11.

Decision for my account: I've opened a bull position in BTZ, structuring the position as long shares. I like the combination of dividends along with good odds on capital gains.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and 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.