There are several different charts we use to evaluated the fix income market. They include the following, the DWA Bond Average
(DWBOND), Dow Jones Corporate Bond Index (DJCORP), Treasury Thirty, Ten and Five Year Yield Indices, as well as the futures.
The DWA Bond Average used to be the Dow Jones 20 Bond Average until they discontinued it in April 2002. We have updated the index and are
maintaining the average under the symbol DWBOND. This index is comprised of 20 long term bonds. This chart remains our primary bond indicator. The signals given are typically long term and in the past have been very accurate. This average is plotted on a point and figure chart with a box size of .20. The average moves slow and does not often give signals, but when they occur, we pay attention. A sell signal, which is given when a column of Os exceeds a previous column of Os, suggests that rates are about to rise. The opposite holds for buy signals.
The Dow Jones Corporate Bond Index (DJCORP) incorporates a total of 96 investment grade, non-callable bonds across the maturity spectrum. As well, it draws issues from the Industrial, Financial and Utility/Telecom sectors. The primary differences between this index and the DWBOND are the equal representations between the sectors and maturities. The DWA 20 Bond index is comprised mostly of long-term bonds and would not benefit from strength seen in shorter maturities or a steepening yield curve. For example, if the yield curve were to steepen in a way that yields on the 10 yr.+ issues rose but 5 to2 yr remained constant the DWBOND index would underperform because the maturities of its components are mostly long term. By evaluating the .25 point charts of the 5yr (FVX), 10yr (TNX) and 30 yr (TYX) yield indices we can get an indication of the how the different maturities are likely to move.
There is a lot of information and it’s all technical in nature. We are trying to establish what security or group of securities is dominating the market. We divide the market in 6 asset classes and use Dynamic Asset Allocation to determine the leaders from – US Equity, International Equity, Fixed Income or Bonds, Currency, Commodities or Cash. From here we can drill down and either increase our equity exposure or increase our cash exposure if warranted to protect our portfolio from the ultimate gyrations that occur in the market over time.