Technical Analysis of ACM Income Fund, CEFs in General, Doesn't Make Sense

I came across this article by TradingMarkets.com today that listed the ACM Income Fund (ACG) under the heading "Low-Priced Stocks Ready to Surge." I see articles periodically that combine closed-end funds with technical analysis, but I haven't been able to make the connection on how this information is useful. I often think that it was a mistake that a CEF was included in the technical screen.

I can understand looking at a fund's market price in relation to its NAV to see if the discount is increasing or decreasing, but not looking at the market price in isolation. And as far as ACG, I'm not sure how big of a price movement a "surge" is equivalent to, but since this is a somewhat conservative bond fund, I wouldn't expect its market price or NAV to move too much over any short time period.

ACG 1-yr chart:

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Comments

[jason meshnick:]

While I agree with your analysis that this stock has limited upside, I vehemently disagree that technical analysis of CEF's doesn't work. TA was a key input for me during the 5 years that I traded closed end bond fund's for 2 major broker/dealers. But you need to look beyond the fund itself. The key is analysis of the markets that impact the fund as well as the premium/discount. Once that analysis is done, the trader can look at the fund using trend analysis, support/resistance and tape reading. Of course, 1/8 of a point was all I needed to have a nice day. Closed end bond funds are not volatile and make poor trading vehicles for small traders.

My point is, that anything with a price can be analyzed using TA. But it can't be used in a vacuum. And, if you are trading mechanically, you should also understand the fundamental reasons why a stock may or may not fulfill technical price targets. That appears to be the problem in this example.

Jason

2006 Oct 17 08:48 PM

[Eric:]

Hi Jason,

I understand your points. The technical analysis I was thinking about was of the depth that was mentioned in the article, which is similar to what I have seen in other articles. It sounds like you did a lot more analysis for your trades. I was also thinking in terms of individual investors, which, as you implied, would have difficulty making profits after transaction costs with a small price increase.

Regards,
Eric

2006 Oct 18 10:44 PM

[jason meshnick:]

Agreed. The screen that turned up ACG sounds like it was poorly run.

I've been away from the CEF world for a while now and look forward to reading more of your work. CEF's have some characteristics that make for interesting analysis.

Thanks for putting this blog together,

Jason

2006 Oct 19 12:18 AM

[Eric:]

Thanks Jason. A lot of interesting new funds have been launched over the last few years, so now is probably a good time to start following them again. Many of the newer funds with similar strategies are trading now trading at big discounts, creating good investing/trading opportunities.

Eric

2006 Oct 19 11:08 PM

[jason meshnick:]

Thanks Eric. I will definitely start researching them.

Jason

2006 Oct 20 12:04 AM

[biomedlives:]

Because it has substantial leverage, I don't regard ACG as a conservative bond fund. Note that it has cut its dividend as rising interest rates have made its short term borrowing more expensive.
JS

2006 Oct 25 05:54 PM

[Eric:]

Hi JS,

What I meant in my post was that as a bond fund with around two-thirds of its assets invested in AAA bonds, even though it is leveraged, ACG is a somewhat conservative security, especially compared with an individual stock. Compared to just other bond funds, I agree that because of its leverage, ACG is not the most conservative option.

Regards,
Eric

2006 Oct 25 10:06 PM

[UserThunder...:]

I agree with the premise here, but that is precisely why you search for CEF's trading at a discount to NAV.

Mar 12 05:38 PM