Returning To High School, Investment Style | Seeking Alpha

Returning To High School, Investment Style | Seeking Alpha



Cam Hui has written an outstanding primer on bonds and how to relate them to the stock market.  Risk appetite in the market can be measured in a number of ways to determine whether you should be in or out of stocks on the long side.  Unless we are in a bear market, I think there should always be exposure to both stocks and bonds.  The question is what is the best mix to achieve the largest and safest return.



Going back to market risk appetite, Cam suggested one very good way to determine if your main bias is risk on for stocks.  He compared HYG, corporate bonds, to IEI, intermediate treasuries, as a risk parameter since both bond types have a duration of around 4 years.  If the chart of HYG:IEF is going up, then all is well with the stock market.  If the chart trend gets broken, then stocks could become a risk off situation.



Cam also mentioned that a comparison of HYG:TLT can be a false alarm.  You might get out of stocks too soon if you look for a broken uptrend there.  For example, the HYG versus TLT (long bond treasuries) chart uptrend was broken months ago while the S&P 500 has continued to rise.  You would have lost money by sitting on the sidelines in 2014.



Moreover, Mr. Hui brought up another comparison between Emerging Market Bonds (EMB) and 7-10 year treasury bonds (IEF).  Both of these ETFs have a duration of a little over 7 years.  So, they are good for risk on/off statistics.  The volatility of these bonds is much greater than shorter term bonds, but the upward trend has not been broken.  Hence, the stock market is still safe with this 3rd bonds versus treasuries comparison.  The trend lines in all cases were determined from the pullback lows of the charts.