High Yield Bond ETF Looks Good On Market Dip

This market correction is a moderate buying opportunity in select sectors. The S&P 500 has sold off 6% from the YTD intraday high to Friday's intraday low. As widely reported, this is the steepest decline in 4 1/2 years.

The fundamentals behind current economic growth are still solid, although there are serious issues. GDP for the quarter clicked out a better than expected 3.4%. It is our opinion that a full blown recession is not upon us and the Fed has the ability, through a lower discount rate, to avoid any deep economic slide.

Although we may still have some down side left in the market, we are starting to move dollars into select sectors. We sold half of the S&P 500 short ETF (SH) position 5 minutes before close yesterday. It was just shy of the 5% price appreciation return mark. The remaining half we will unload with another 1% addition. We have started to work money into the iShares iBoxx $ High Yield Corporate Bond Fund (HYG). Our weight has already reached 4% in 3 days. We will hold off on further purchases for the moment. If we see an additional 3% slide from current levels, we can see the weight rising to roughly 6%.

Additionally, we are starting to eye our commodity allocation with a potential exit point around August/September. The thesis goes as follows: Although we believe commodities are in a long term bull market, there will be many opportunities to take profits. As such, we see a potential spike in the next few months. This spike could come from any number of issues, but this time frame in particular is peak hurricane season.

We will take the opportunity to exit the position completely and re-establish in the fall. We feel very solid with our current large cap weight with a bias toward growth. At this point we will have worked cash down to roughly 10%. Should the S&P 500 go into negative territory on a YTD basis, we will move the allocation down to 8%-5% . If there's a correction of 10% to 13% from YTD high, we will be fully invested.

HYG 3-mo. chart:

Comments

[Nidhi Kadalbal:]

Unemployment report on Aug 3rd is another metric to watch out.

creating-wealth.blogsp.../

2007 Jul 31 11:29 PM

[Elliott:]

Yes, I agree. Many closed end funds have sold off hard, including many which do not have exposure to CDOs or subprime mortgages. Take Evergreen Income Advantage Fund (EAD) for example -- 88% is BBB, all corporate bonds spread across multiple sectors. Holds no CDOs. Down -14% from its June high, EAD pays a monthly dividend at a 10.9% annual rate. I'm not saying buy EAD now but this subprime implosion is taking down some innocent CEFs. With careful selection there are some bargains out there.

2007 Aug 02 12:24 AM