Bonds Provide Some Intrigue Amid Inert Market

 | Feb 09, 2017 | 6:00 AM EST
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Can you believe it? Another day where the S&P barely moved.

Perhaps it's because everyone is already so bullish. The Investors Intelligence bulls chimed in at 62.7%, the highest reading we've seen since the last week of December 2004 and the first week of January 2005. The S&P promptly fell 4%.

Can that happen now? Sure. Will it? Well heck, the pieces are in place, but all we see is constant chop. Just when I thought we might get some volatility in the market, the only place we saw it was in the bonds.

As you know, I have been in the camp that said rates were heading down. I have based it mainly off the action in the five-year note. It was my view that the breakout over 1.8% was late and lethargic. Now it finds itself back at 1.8%. If we draw the red line and connect the lows, the actual break was back around 1.85%. So the key is if a rally in yields can get back over that level.

Here's where it gets interesting. That head-and-shoulders top measures to around 1.65%, which is essentially where the green line comes in. It's not difficult to imagine all those calls for higher rates changing if the five-year yield gets down there.

So as long as the yield on the five-year cannot get up and over 1.9%, I think it's going to test that green line.

In the meantime, the utilities again find themselves at some resistance, but I do think they eventually clear it. It seems to me that all the bulls who are paraded out on television have two groups they don't like: utes and telecom. Perhaps that will change over time since, after all, there is nothing like price to change sentiment!

As for the rest of the market, it has truly gone lifeless. While I don't recall the market being nearly as lifeless in 1991 as it is now, I did notice we had a similar move back then. We'd had a bear market of sorts in 1990 as the S&P plunged when Iraq invaded Kuwait and then it bottomed when we went to war in January. And then it sat there, trading between 360 and 390 for nearly eight months.

Yes, I realize the percentage of the swings was quite a bit more than we have now, but the picture looks quite similar, don't you think? What I do recall is that folks were very bearish heading into the middle of January, as they were heading into the election this time (both being "events") and, similar to the current environment, they turned very bullish quite quickly. By early February 1991, there was complacency everywhere.

Sound familiar?

I hope that's not what this turns into, or at least if this is like that period of time let's hope we get some 8% swings like we did then!

For more market analysis from Helene Meisler, sign up for Top Stocks, published five times a week.

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