Technicals, Fundamentals, And A Discount To Value Make BCF A Buy

05/27/08 11:18:09 AM

by Mike Carr, CMT

Closed-end funds are an often-overlooked trading vehicle, despite the wealth of available fundamental data that can be used to lower risk.

Security: BCF
Position: Buy

BlackRock Real Asset Trust (BCF) is a closed-end mutual fund that invests in energy, natural resources, and basic-materials companies. This gives it exposure to mining, oil and gas, chemicals, forest products and paper, coal, iron and steel, and pipelines sectors. These are segments of the market doing well now and likely to prosper in an inflationary environment.

In Figure 1, we see that BCF is near a buy signal, even after showing recent strength. Williams' %R is a reliable indicator used to determine whether the market is overbought or oversold. Williams' %R is very similar to the stochastic. A major difference is that %R is more responsive than the stochastic oscillator because it does not use smoothing the way the stochastic does.

FIGURE 1: BCF, DAILY. In the daily chart, BCF is near a buy signal from a four-day Williams' %R, which will occur when %R rises above 25.

Graphic provided by: Trade Navigator.

As can be seen in Figure 1, %R has reliably identified short-term bottoms in the past. Buying just above the high of the day the signal occurs, with a stop at the low, should set up a trade with about a one-point risk.

An additional factor to consider when trading closed-end funds is the discount or premium to net asset value. This characteristic is unique to closed-end funds, and defines the relationship between the market price and the underlying price of the assets held by the fund. If the shares of a closed-end fund trade at a value higher than the underlying assets, the fund is said to be trading at a premium. A discount occurs when the net asset value exceeds the market price. For BCF, the net asset value of 21.61 is about 14.1% above the market price of 18.56 as of May 23. In effect, investors are buying a dollars worth of stock for about 0.86. Historically, BCF trades at about a 10% discount to net asset value (NAV). A return to this average will lead to a gain for traders.

Combining the technical picture with exposure to fundamentally attractive sectors in the market and a discount price, BCF is a buy at current levels.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."