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The chart of a preferred stock ETF is demonstrating a potentially bullish cup-and-handle formation.

While most major averages continue to churn somewhere between their post-2015 downtrend lines and the 2015 highs, numerous bullish setups in individual names and sectors continue to pop up. By bullish “setups” we are referring to chart patterns that have reliably preceded upward moves in the past. Now, by “reliably”, we mean a majority of the time, not all of the time. Nothing works all of the time. However, there are identifiable patterns that suggest greater odds of further gains going forward on a particular chart. One of those patterns is a “cup-and-handle”, and we have identified a present example of it in today’s Chart Of The Day.

We’ve noted the characteristics of cups-and-handles and the potential theory behind their bullish implications in the past. Let’s reiterate those points as applied to the chart of the PowerShares Preferred Portfolio ETF, ticker, PGX (unadjusted for dividends).

The Cup: This phase includes an initial high on the left side of a chart (e.g., the 2013 high in PGX just over $15), followed by a relatively long, often-rounded retrenchment before a return (e.g., early this year) to the initial high.

The Handle: This phase involves a shorter, shallower dip in the stock and subsequent recovery to the prior highs (e.g., the January-May period in PGX).

Now, PGX may not be a textbook cup-and-handle pattern with the rounded cup. However, rarely does one find a perfectly textbook cup-and-handle, or other chart pattern for that matter -- except in the textbook. All we care about is whether the conditions satisfy the 2 criteria and, in our view, they do. 

The bullish theory is predicated on the idea that after taking a long time for a stock to return to its initial high during the “cup” phase, the “handle” phase is much briefer and shallower. This theoretically indicates an increased eagerness on the part of investors to buy the stock since they did not allow it to pull back nearly as long or as deep as occurred in the cup phase. Regardless of the theory, the chart pattern has often been effective in forecasting an eventual breakout and advance above the former highs.

How high does the pattern suggest prices will go upon a breakout? As we’ve mentioned before, we are not big fans of setting targets. We prefer to deal with price should it reach a certain level as opposed to expecting or relying on price to hit said level. That said, there are rules of thumb pertaining to how far price may go upon a breakout above the highs (i.e., top of the cup). Such targets vary between 50%-100% of the top-bottom range of the cup. In the case of PGX, such a move would be roughly a 6%-12% advance.

Now, you may be thinking that’s not much of a move to get all excited about. However, considering the very low beta in preferred issues, that’s nothing to sneeze at. Remember, preferred shares are a hybrid between stocks and bonds. They provide a fixed dividend that takes priority over payouts on common stock. And they are among the various higher yielding instruments that have successfully served as competition for low-rate fixed income securities for several years now. So a 6%-12% high-confidence move would be very welcomed indeed for an income-focused investor. Speaking of income, neither the chart, nor the 6%-12% take into account PGX’s hefty yield of 5.73%!

Theoretically, preferred stocks and funds should continue to do well under the perpetuation of the “lower for longer” interest rate policy. However, even if the Fed should surprise and hike rates in June again, it may not be a death knell for preferreds. If you recall, the last time we mentioned these issues was in late December following the last rate hike. That post pointed out that, following a brief, sharp dip by preferred issues coinciding with the rate hike, they wasted no time in recouping those losses, even moving to new highs in very short order.

So our advice would be, don’t sweat what the Fed is or isn’t going to do or say. Any pertinent data or events will be filtered through the market anyway. Focus instead on the action in prices and the market. There are still plenty of constructive price patterns to be found out there. That includes preferred stock funds, whose potential cup-and-handle pattern is likely preferred by 9 out of 10 stock bulls.

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More from Dana Lyons, JLFMI and My401kPro.

Every retiree’s dream investment is to find safety in principal and earn enough income to not have to touch that principal. In a world of zero percent short-term interest rates, this is easier said than done.

These days there’s no such thing as living off the interest income anymore. In the understatement of the year, yesterday the Fed admitted that the credit markets are currently showing some signs of a reach for yield. As everyone already knows by now, low interest rates can lead to the unappealing choice of safety with lower yields or risk with higher yields.

It may not feel like it, but interest rates have actually risen this year. The 10 year treasury yield ended 2014 at 2.17% and currently sits at around 2.38%. This has led to losses in a handful of income-producing investments this year. When thinking about the risks in many of the current bond-substitutes investors are using, it can be helpful to look at how they performed during past market upheavals.

Here’s a table that shows many of the most popular higher yielding investments investors have been flocking to over the past couple of years along with their current yield, 2015 returns to date and their performance during the taper tantrum and last large U.S. stock market sell-off:

I’ve also included the S&P 500 and the Barclays Aggregate ETF for comparison purposes. You can see that many of these risky assets can lose their entire annual stream of income in just a few short months. Some have done so this year already. Some of these investments held up better when interest rates rose, while others performed better when stocks fell.

Unfortunately, there’s no such thing as a “safe bet” if you’re looking for yield right now. Risk and return are always attached at the hip, but risk gets dialed up a notch with income-producing investments when yields are so low. Investors also have to be aware of the fact that there are plenty of others out there who have also joined the chase for yield. It’s hard to say how this will affect these investments going forward.

Many retirees try to focus exclusively on how much income they can earn on their portfolios. I always like to think in terms of total returns and not just income or yield. Seeing a large yield often provides investors with a false sense of comfort if they’re not aware of the underlying risks attached to that yield. With the relentless rise in the stock market over the past six years or so, I can understand why so many investors would like to find a relatively less risky place to allocate to that also pays some income above the rate of inflation.

That strategy can work, but you have to understand the potential risks from this approach, including the fact that many other investors have been thinking the same thing for a number of years now. You always want to have a reason for every investment in your portfolio. Yield alone isn’t enough of a reason.

Further Reading: It’s Not a Chase For Yield, It’s a Chase For Fees

My new book, A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan, is out now.

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This post from Ben Carlson (@awealthofcs) originally appeared on A Wealth of Common Sense.

Most investors spend their time worrying about the stock market, but the bond market is in a fascinating place right now. Interest rates are low, but retirees and risk averse investors need sources of income and a less volatile ride than the stock market provides.

Everyone seems to want rates to rise, but it’s just not happening. Talking to a number of different investors over the past few months has led to a realization — nobody has a clue about what to do about bonds.

There are many different strategies and income-producing assets out there, but nothing’s perfect. Some stick with high quality government bonds regardless of the level of rates. Others are happy to look for higher yields elsewhere, further out on the risk curve. There are a number of ways to add income exposure to a portfolio, but yield is only the starting point. Risks must be considered as well.

Here are a few options, sorted by risk:

Interest Rate Risk.

This is the biggest worry for bond investors right now, especially those holding high quality government issues such as treasuries. The correlation between current interest rates and future long-term returns is very high (around 0.90). This means lower performance can be expected in high quality bonds at these interest rate levels, something everyone has heard by now.

Inflation Risk. Inflation is the biggest risk to lower interest rates, as I’ve detailed in the past. There’s much less room for error. The historical record of bonds in rising interest rate and highly inflationary environment isn’t pretty:

It doesn’t look like much, but over 30 years that’s nearly a 40% loss in terms of purchasing power because of the effects of inflation.

Duration Risk. To combat interest rate risk and inflation risk, investors can choose to either lengthen or shorten the maturities of their bond holdings. Each option comes with potential problems.

Using longer bond maturities can increase your yield but also increases your chances of getting slaughtered in a rising rate environment. Higher rates and longer maturities are at higher risk of volatility and losses in a rising rate environment.

Or you could stick to the short end of marturities to decrease the effect of rising rates based on the theory that you could rollover your short-term bonds into longer-term holdings if and when rates ever rise in a material way. The risk here is that you could lose out on total return from lower yields.  Many investors have been waiting for a number of years now in short duration bonds, anticipating a rising rate environment that just hasn’t materialized.

As usual, trade offs abound.

Sovereign Risk. Emerging market bonds offer higher interest rates, but they come with potential country-specific risks. Bond investors are usually more concerned with returnof capital than return on capital.

Emerging market countries are no strangers to a crisis, but even when a minor flare-up occurs, there can be issues. In 2013, EM bonds were down 8%, supposedly on worries of how the Federal Reserve’s policy decisions would affect many EM countries. They’ve basically made back the losses in 2014, but provide a much wilder ride than most developed country sovereign bonds.

Asset Risk. There are a host of higher yielding investments that many view as bond substitutes, but most fail in the one area high quality bonds usually shine — preserving capital during stock market losses.

When the S&P 500 was down almost 20% in the summer of 2011, these were the drawdowns for some of the various higher-yielding investment options (along with their corresponding ETF tickers):

Dividend Stocks (SDY) -16%

Preferred Stocks (PFF) -8%

Convertibles (CWB) -15%

Bank Loans (BKLN) -8%

Master Limited Partnerships or MLPs (AMLP) -13%

REITs (VNQ) -14%

High Yield Bonds (JNK) -7%

Portfolio Risk. This is probably the most important one. Investors searching for income have to be willing to make certain trade-offs or sacrifices in a low rate world. Investors have to figure out the purpose of bonds or income streams in a portfolio. Every asset class or holding within a portfolio should have a reason for inclusion.

For bonds it could be:

Reliable income?

A higher yield?

Performance over inflation?

A shock absorber during a stock market crash?

Diversification benefits?

Figure out this question and hopefully the fixed income portion of a portfolio becomes easier to define. I also think that creating a bond ladder is a straight forward way to manage risk in fixed income assets, as well.

But there really are no easy answers right now.

This post from Ben Carlson (@awealthofcs) originally appeared on A Wealth of Common Sense.