Someone posed a good question to me on Tuesday. In fact, I thought the question was interesting enough to share with you. I was asked, Why would anyone be bullish in the market right now?
The person's reasoning was that inflation is high, quantitative easing is ending, and we have the Russians breathing down Ukraine's neck.
This person is not wrong. Those are all very real concerns. But isn't that why Wall Street uses that old adage, that stocks climb a wall of worry? And isn't it also true that there is nothing in this person's reasoning that isn't known already? If you are a market player, you have clearly been living under a rock if you don't know the Fed is going to cut back on its bond buying program. Not to mention the Fed's plan to raise interest rates.
The question is, At what point is it all priced in? At some point the market has digested all the news and has decided the market reflects that news already. I have a button that reads, if it looks great, it's too late.
What chart looks terrible at its highs? I can't think of one. What chart looks awesome at the lows? Hard to imagine, isn't it?
That's why we care about sentiment. It's why we care about all the indicators. It is our hope that they will guide us through the news of the day or the month. It's not as though inflation hasn't been the lead story on the nightly news for a month or more. It's not as though Russia's planned invasion of Ukraine hasn't been on the front page of every newspaper.
It's possible the average person doesn't know interest rates are up, but you can be sure business owners know it. You can be sure someone looking to buy a house knows it. And for sure the bonds know it. They just leak lower on a daily basis now, don't they?
The Daily Sentiment Index for bonds is now 12. If we use bond exchange-traded fund (TLT) , we see there are some prior lows at $134. In any event, $132-$134 is support. If we to a measured target from that blue line, since that really is where/when the bonds broke down we get a target in that area as well.
A measured target comes when we take the high of the pattern, which I am going to use $151, because I tend to ignore spike highs; most of the highs are at $151 and subtract the low at $142 (again I am throwing out that little spike low at $141) we get $9. If we subtract $9 from the breakdown ($146) we get $137. If you prefer to use the spikes, then the math is $154-$141=1$3 and $146-$13=$133 it doesn't change the equation much does it? TLT is into the zone.
On Wednesday we get the Fed minutes from the January meeting, so perhaps they might take the bonds on that last whoosh lower to get the DSI to single digits but I'm of the mind we're into the area now that says "enough."