I was asked this past weekend if everyone is now officially bullish. The answer is this: I do not get the sense that there is giddiness in the markets. Rather, I get the sense that, on afternoons such as last Thursday -- when the market had rallied hard for the second day in a row -- folks have begun getting anxious. They've started to feel as though the train has left the station without them.
By the same token, following afternoons such as that of last Tuesday -- when the market has fallen hard for two days in a row -- all sorts of bearish talk emerges. Mainly it's talk of revisiting the lows. I would say, therefore, that sentiment remains cautiously optimistic on up days. I believe that's why a single down day does not seem to bother folks, but after two down days folks start to fret. As I noted last week, after Monday no one seemed terribly concerned -- but, by the end of Tuesday's session, anxiety was the name of the game.
Friday's action reminds me a bit of what we saw the preceding Monday, in that the comeback from the opening lows emboldened the bulls. So perhaps we'll see some more shaking-out this week.
For those of you keeping track, the market assumed an overbought condition just a bit over two weeks ago. At that point, the S&P 500 closed at 1254, and today it stands at 1253 (red box on the chart below). That is why an overbought reading might not matter from day to day. Over time, what it shows you is that the market has lost upside momentum and needs either time or price -- that is, a move down -- to bring it back to the point where it has worked off the overbought reading. You can see the oscillator is moving downward now. I expect it to have fallen far enough by the end of the week.
I have spent much time recently discussing the yield on the 10-year U.S. Treasury bond, but today I want to address the yield on the five-year note. Let me remind you I am not an economist but, rather, a chart reader on the topic. That said, if you look at this chart, I believe you can see that the 1% level has become important since it was breached in early August. That level was not recaptured until Oct. 6.
That means that, during each S&P rally this past August and September, the yield on the five-year note never rose above 1% -- so the rallies were not sustainable. For the whole month of October, after it crossed that level, it remained above 1%. Last Monday, it fell back below 1% and has not come close to recapturing it.
I have drawn in a red downtrend line that should offer support if the yield declines to that level (around 0.8%). Perhaps this is a temporary correlation, but I was similarly concerned about the 10-year note after it failed to recapture 2.10% last week. Now I am watching the yield on the five-year bond, as it did not hold as well as the 10-year did Friday.
I realize we continue to be held captive by Europe and the headlines from there. But, based on the indicators, I expected volatility last week and I continue to expect it this week. The market is still registering as overbought.