Flight-to-Safety ETFs for Bonds, Utilities and Gold Have Upside Limits

The ETF for treasury bonds is outperforming ETFs for utility stocks and gold. Avoid the ETF for junk bonds.
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Investors have several options when they consider flight-to-safety ETF investments. 

In the bond market they've got the 20 Plus Year Treasury Bond ETF  (TLT) - Get Report and the SPDR Bloomberg Barclays High Yield Bond ETF  (JNK) - Get Report

Investors seeking dividends can choose the Utilities Select Sector SPDR Fund  (XLU) - Get Report. 

Gold is a fourth option and my choice for this option is the SPDR Gold Shares ETF  (GLD) - Get Report.

The treasury bond ETF is a basket of U.S. Treasury bonds with maturities of 20-plus years to 30 years. As a stock-type investment, it never matures, and interest income is converted to periodic dividend payments. 

This is a proxy for tracking the 30-Year U.S. Treasury Bond, the yield on which set an all-time intraday low of 1.79% on Feb. 25. (Bond yields drop as prices rise.) This exceeds my monthly risky level of 1.85%.

The Weekly Chart for TLT

Weekly Chart For TLT

Weekly Chart For TLT

Courtesy of Refinitiv XENITH

The weekly chart for TLT is positive but overbought, with the ETF above its five-week modified moving average at $144.60. 

It’s also well above its 200-week simple moving average, or reversion to the mean, at $126.99. 

The 12x3x3 weekly slow stochastic reading is projected to rise to 84.51 this week from 81.46 on Feb. 21, well above the overbought threshold of 80.

From bottom to top the horizontal lines are the annual, quarterly and semiannual value levels at $124.97, $129.96 and $136.53. That last figure was the buy level as the year began. This month’s pivot is at the top the chart, at $149.28.

Trading Strategy: The strategy for February was to reduce holdings to its monthly pivot at $149.28.

I have been negative on junk bonds as the yield spread versus treasurys keeps widening. TLT is up 11.5% year to date, with JNK down 1.4%. JNK moves with the stock market, not the treasury-bond market.

The Weekly Chart for JNK

Weekly Chart For JNK

Weekly Chart For JNK

Courtesy of Refinitiv XENITH

The weekly chart for JNK is negative, with the ETF below its five-week modified moving average at $109.43. 

This week the ETF fell below its 200-week simple moving average, or reversion to the mean, at $108.48.

The 12x3x3 weekly slow stochastic reading is projected to decline to 76.55 this week from 79.53 on Feb. 21. 

The horizontal lines are the quarterly and annual value levels at $104.86 and $107.03. Its weekly, monthly and semiannual risky levels are $110.11, $111.46 and $114.58, respectively.

Investor Strategy: Reduce holdings on strength to weekly and monthly risky levels at $110.11 and $111.46, respectively.

Investors looking for dividends own XLU, which represents the Dow Jones Utility Average. The average set its all-time intraday high of 944.59 on Friday, Jan. 31. The year-to-date gain is 6.8%. 

XLU makes sense when the dividend is above 3%. The current dividend is 2.85%, which is a reason to reduce holdings.

The Weekly Chart for XLU

weekly Chart For XLU

weekly Chart For XLU

Courtesy of Refinitiv XENITH

The weekly chart for XLU is positive but overbought, with the ETF above its five-week modified moving average at $68.03. 

It’s well above its 200-week simple moving average, or reversion to the mean, at $54.53. Note how the reversion to the mean provided an important buy level at $47.56 during the week of Feb. 9, 2018.

The 12x3x3 weekly slow stochastic peaked at 91.22 during the week of Feb. 21, as the ETF was setting its all-time high of $71.10. 

When a ticker has a reading above 90, it’s in an inflating parabolic bubble formation, which is a signal to reduce holdings.

Trading Strategy: Be patient. Buy weakness to the annual and quarterly value levels at $63.31 and $62.84, respectively, and continue to reduce holdings on strength to its monthly risky level at $69.83.

The gold ETF GLD tracks the spot price of gold and is said to be backed by gold bars in vaults in London. This ETF set its 52-week high of $158.53 on Feb. 24, as the stock market swooned on the spread of the coronavirus.

The Weekly Chart for the Gold ETF

Weekly Chart For GLD

Weekly Chart For GLD

Courtesy of Refinitiv XENITH

The weekly chart for GLD is positive but overbought, with the ETF above its five-week modified moving average at $149.24. 

The ETF is well above its 200-week simple moving average, or reversion to the mean, at $124.57. 

The 12x3x3 weekly slow stochastic has moved above 90, so this ETF is now in an inflating parabolic bubble formation, which is a warning to reduce holdings.

Trading Strategy: Reduce holdings on strength to its monthly risky level at $159.09. Buy weakness to its quarterly risky level at $133.76.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the past nine closes in these time horizons.

Monthly levels for February were established based upon the Jan. 31 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.