Zweig Bond Model Signals What ETFs To Be In

July 19, 2016

So, What To Do With Bonds?

I've long been a fan of the great Marty Zweig. In the mid-1980s, Marty and Ned Davis Research (NDR) created the Zweig bond model. Back then, the world was dealing with a rising interest rate environment. The 10-year yield peaked at 14% in 1984.

We did some work with NDR and recreated the simple trend-following model, and we use it internally to help us invest in longer-dated bond ETFs or switch to shorter-dated bond ETFs, such as the SPDR Barclays 1-3 Month T-Bill ETF (BIL | A-62) or the PIMCO Enhanced Short Maturity Active ETF (MINT | B).

It kept us invested in high-quality, longer-dated bond ETFs despite the fundamental forecasts that called for higher interest rates. As the axiom goes, "Let the trend be your friend."

5 Steps To The Model

It is a simple process and you can do this yourself. There are five steps to the Zweig bond model's scoring process:

  1. Score a +1 when the Dow Jones 20 Bond Price Index (index symbol $DJCBP) rises from a bottom price low by 0.6%. Score a -1 when the index falls from a peak price by 0.6%.
  2. Score a +1 when the Dow Jones 20 Bond Price Index rises from a bottom price by 1.8%. Score a -1 when the index falls from a peak price by 1.8%.
  3. Score a +1 when the Dow Jones 20 Bond Price Index crosses above its 50-day moving average by 1%. Score a -1 when the index crosses below its 50-day MA by 1%.
  4. Score a +1 when the Fed Funds Target Rate drops by at least 0.50%. Score a -1 when the rate rises by at least 0.50% point. Score +1 if a buy and -1 if a sell.
  5. Score a +1 when the yield difference of the Moody's AAA Corporate Bond Yield minus the yield on 90-day Commercial Paper Yield crosses above 0.60%. Score a -1 when the yield difference falls below -0.20%. Score it 0 for a neutral score between -0.20% and 0.60%.

Next, sum the scores of steps 1 through 5 once a week. The current reading is +3. (The chart below reflects calculations as of close on July 11. See yellow highlight bottom right-hand corner.)

 

Zweig Bond Model

For a larger view, please click on the image above.

 

If the total is +1 or higher, we would suggest considering a total bond market ETF such as TLT, the Vanguard Extended Duration Treasury Index Fund (EDV | C-50), the Vanguard Total Bond Market Index Fund (BND | A-94) or the iShares Barclays Aggregate Bond ETF (AGG | A-98).

If the aggregate score is -1 or lower, we would suggest considering BIL or MINT.

Let The Trend Be Your Friend

The objective is to stay in line with the bond market's primary trend.

With interest rates at 5,000-year lows, one has to take a step back and consider solutions that can better manage risk. We are living in a highly unusual and experimental central bank policy world. Yet there are ways for you to make money, using the broad set of tools ETFs provide.

The Zweig bond model is posted every Wednesday on my Trade Signals blog.

At the time of writing, CMG Capital Management owned all of the securities referenced above. Steve Blumenthal writes a free weekly economic research letter that covers valuations, probable forward 10-year returns, global macro issues and investing. Each week, you'll find a link to trade signals, which includes the most recent Zweig Bond Model chart. You can sign up here to receive his weekly On My Radar e-newsletter.

 

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