How the Zweig Bond Model Works:
There are five steps to the scoring process. Here is how the tactical trend following model works:
- Score a +1 when the Dow Jones 20 Bond Price Index (index symbol $DJCBP) rises from a bottom price low by 0.6%. Score a -1 when the index falls from a peak price by 0.6%.
- Score a +1 when the Dow Jones 20 Bond Price Index rises from a bottom price by 1.8%. Score a -1 when the index falls from a peak price by 1.8%.
- Score a +1 when the Dow Jones 20 Bond Price Index crosses above its 50-day moving average by 1%. Score a -1 when the index crosses below its 50-day MA by 1%.
- Score a +1 when the Fed Funds Target Rate drops by at least ½ point. Score a -1 when the rate rises by at least ½ point. Score +1 if a buy and -1 if a sell.
- Score a +1 when the yield difference of the Moody’s AAA Corporate Bond Yield minus the yield on 90-day Commercial Paper Yield crosses above 0.6. Score a -1 when the yield difference falls below -0.2. Score it 0 for a neutral score between -0.2 and 0.6.
Next, sum the scores of steps 1 through 5 once a week (the chart below reflects Friday’s close calculations).
If the total is +1 or higher, we would suggest an investment in a total bond market ETF such as TLT (iShares 20+ Year Treasury Bond ETF), EDV (Vanguard Extended Duration Treasury ETF), BND (Vanguard Total Bond Market ETF) or AGG (iShares Barclays Aggregate Bond Index ETF). The longer duration ETFs like TLT and BND will have more gains or losses on interest rate moves. If the aggregate score is -1 or lower, we would suggest buying BIL (SPDR Lehman 1-3 Month T Bill ETF) or MINT (PIMCO’s Enhanced Short Maturity ETF).
The chart reflects the annual gain per annum versus a buy-and-hold gain (See this weeks Trade Signals for the most recent chart).
The process was developed in the mid-1980s and remains the same since its inception. The data goes back to 1967 with the Barclays Aggregate Bond Index to 1976 and the Ibbotson Long-Term U.S. Bond Index from 1967 to 1976. I intend to post this chart each Wednesday in Trade Signals. Over that stretch of time, the model has done a good job at enhancing return and reducing risk in rising rate environments (refer to the chart – highlighted orange rectangle).
The bottom section of the chart shows the combined score of the model’s five measurements. A buy is generated on scores > 0 and a sell on scores < 0. The model remains in a buy signal. ETFs such as BND can be used to express the view.
A quick aside: If you choose to trade following the Zweig Bond Model or any other process for that matter, there are several important questions to ask yourself: Do you have the time to follow the model every day? Do you have the infrastructure in place to trade across multiple accounts? Can you execute ETF trades with little market impact and trade for very low commission? Do you have the conviction and belief necessary to follow the process through both losing trades and winning trades? Can you stick to the process over time?
I have traded our high yield trend following strategy for more than 20 years. Not every trade wins. This is about probabilities and staying in line with the primary bull market trend. It is about avoiding significant declines. There were many times when I fundamentally questioned a trade yet, for most trades, the process proved correct. I frequently say that half the battle is having a sound investment process and the other half is having the discipline to stick to the process.
So if you don’t have the time and/or infrastructure, then find some flexible bond funds and/or a managed bond strategist who can do the work for you.
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