Trading Thoughts - Relative Strength Bond Strategy

I spend a lot of time reading books or blogs on trading and investing. I really enjoy exposing myself to different perspectives on the market.  During my journey, I have come across countless sources that have discussed a rotational stock trading strategies.  Relative strength is a popular method for capturing the returns of the best performing instruments.  You will commonly see this strategy applied to different stocks or stock sectors.  It often generates much better returns with less risk than a traditional buy-and-hold strategy.

In all of my research, I have never seen a relative strength strategy applied to bond funds.  I have seen many relative strength strategies that include a bond fund among its many asset classes, but never a relative strength strategy that solely focuses on bonds.  It could be a popular topic that I haven't come across yet or it could be that bonds are not sexy enough to be considered for relative strength algorithms.

I think that bonds are an even better candidate for relative strength than stocks.  Think about it for a second.  Bonds have very low volatility and have a tendency to trend much more consistently than most stocks or asset classes.  This should make it much easier to identify which bonds are performing well and which bonds are not.  Also, when a bond goes from poor to good relative performance, it would have a better tendency to maintain that relative performance for longer periods of time, resulting in fewer performance whipsaws you may see with stocks.  One final point, bonds typically produce better returns during bear markets.  Therefore, if you have a stock trading strategy that is only well suited for bull markets, a bond relative strength strategy could be a fantastic compliment to your stock trading strategy during bear markets.

I am going to apply a simple relative strength analysis to my two favorite bond funds, FGMNX and FNMIX, to evaluate the potential of a bond relative strength strategy.  I think most people assume that bonds have small returns compared to stocks, which in most cases is true.  There are some exceptions though, especially when the stock market has been range bound for over the past decade.  I believe you will find that the results of the strategy will be very enlightening.