By: Elliot Turner
The market ended last year with some violent selling and today started the New Year with a slow, light volume grind higher–this offers a perfect representation of equity trading before and after the March 2009 bottom. The Russell continued to lead the broader markets higher. We often see the “January Effect” take small caps higher in the early part of the year. After today, no major thematic changes popped out with the turn of the calendar.
Rather than harping on some of the same, consistent points in trading post-March bottom, I would like to quickly point out some strange moves over the last week of trading. The first chart below is of the Pimco High Income Fund (PHK). The fund is a closed-end fund that “primarily invests in the U.S. dollar-denominated corporate debt obligations and other income-producing securities. The fund primarily invests in various companies operating in the areas of energy, real estate, telecommunications, manufacturing, and utilities, as well as invests in various foreign investments.”
Essentially what we have here is a diversified corporate bond fund. What could possibly explain the price action of late? PHK sold off on heavy volume last week and continued lower today despite the market’s breakout to the upside. I will continue to watch this to see if there is anything larger at work–could the losses be representative of problems unique to this fund? (PIMCO is great at what it does, I find that to be somewhat unlikely) Should it portend something larger, where will we see the first signs?
The second chart I would like to pull up is that of the Dow 20 Enhanced Performance Fund (DPO). DPO is designed to:
provide shareholders with a high level of premium and dividend income and the potential for capital appreciation. The Fund purchases the thirty common stocks included in the Dow Jones Industrial AverageS(M) (DJIA Index), weighted in approximately the same proportions as in the DJIA Index (the Dow Stocks). The Fund also purchases other securities or financial instruments, swap contracts, designed to provide additional investment exposure (leverage) to them return of the Dow Stocks (the Additional Dow Exposure). It is also engaged in certain option strategies, consisting of writing (selling) covered call options on some or all of the Dow Stocks (the Options).
While this fund does use leverage in order to enhance returns on an investment in the Dow 30 stocks, what could possibly explain the massive selloff of late? Additionally, why did this fund continue to trade lower upon the market’s breakout today?
The moves in PHK and DPO may be harbingers of an unknown turmoil lurking in bond and equity markets; or, they may mean nothing. The fact that more than one such move happened in consistently stable funds that had performed largely in concert with the markets over the duration of the last year indicates to me that something more than meets the eye is present. As of now, neither of these are actionable developments, but they are worth watching.
Tomorrow, I will be looking closely to see if HYG (high yield corporate debt) can confirm the breaking in the broader indices to new highs. HYG has helped lead the market (both higher and lower) since the March lows. If this ETF is unable to breakout to new highs over the next few days, I will execute long trades with a little more caution; and should the ETF ultimately fail to make new highs and break down, I will look more aggressively at shorting opportunities.
I hope everyone enjoyed the holidays and slow time around the New Year. Hope everyone enjoys a Happy and a Healthy New Year! I look forward to spending more time developing my thoughts and hearing from you readers out there during the coming year.
