It’s been a rough year for fixed income markets. The mention in June of the U.S. Federal Reserve slowing their bond purchases in the marketplace caused bond prices to fall this summer. Headlines such as “Bond bull is dead” started appearing in the financial media. But is the bond market dead? Let’s turn to the charts and see what they have to say.
As you will see on the above 20 year chart, the long US bond is now about to test its 20-year bullish trendline. Because the trendline has not yet been broken, it is premature to suggest that the long term bull market for bonds is over. If the trendline breaks, that changes the picture. But that’s not the case right now. As journalist Ralph Carpenter originally said back in 1976 –“It ain’t over ‘til the fat lady sings”. He was referring to a sports tournament when he uttered those words, but we can carry that phrase over to the markets.
Below, you will see a sentiment study provided by www.sentimentrader.com. The indicator at the bottom of the chart is a compilation developed by Sentimentrader showing us the sentiment of options and futures traders, mutual fund investors, newsletter writers and brokerage firm outlooks on the bond market. As with all sentiment indicators, an extreme in bearishness (or bullishness) can be a contrarian indicator. Look to trade in the opposite direction (also known as “fading” their opinion) upon sentiment signals. Right now, sentiment is pretty low for bonds. Extreme bearish sentiment can indicate an oversold situation ready to move up again.
As you will see our chart, a sentiment reading below 0.4 of this study has accurately predicted shorter termed bullish movements on the bond market. We’re there again. Combined with technical trendline support, I wonder if the bond-bears may be in for a surprise in the coming weeks or months. As Mr. Carpenter coined, “It ain’t over ‘til the fat lady sings”.
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YESTERDAY’S BIG RALLY ON THE DOW (UP 192 POINTS) IS ALSO MATCH WITH AN UPSIDE MOVE OF 146.9% FROM ITS BEAR LOW OF 6547 (3/9/2009) BUT THE NYSE ADVANCE-DECLINE LINE DID NOT CONFIRM THE CURRENT BULLISH STAMPEDE. WOULD YOU SELL INTO RALLY LIKE SOME DO?
I am not selling into the current market. Seasonal trends suggest more upside, and the broad market trend remains strong. I don’t use one indication (A/D in this case) to make a decision–I would have to see other bearish factors come into play before selling, and that’s just not the case now. See my post this week on the “Bear-O-Meter” reading–my collection of indicators that I watch suggest average risk profile, not high risk (although not low risk either).
BTW–I tend to watch a 40 week MA on the weekly AD chart for broad trend –and its good at this time.