I am not a Fed watcher. I don't even pretend to be one. But I do know the Fed matters to markets because interest rates matter. And despite what you think about today's markets, interest rates have always mattered.
Perhaps this is why so many folks spend so much time blaming the Fed.
In the fourth quarter of 2018 the bulls blamed the Fed for what seemed to them the "autopilot" nature of the central bank's hiking when clearly things were slowing down. Now the bears blame the Fed for backing off and being data dependent.
However, let's forget what the Fed says right now and look at what the market says about the yield on the 5-Year Treasury Note. This relatively longer-term chart, below, says 2.40% needs to hold or we're looking at lower rates. At least that's how I see it.
I have thought for a while that sentiment was close enough to giddy for bonds that this line would hold. Now I'm not so sure.
Because we have spent so much time churning at the line. Churning at the line allows for energy to build up. In other words, if rates have been falling hard and they get to the line, the break is often exhaustive as they have come so far already. But when they mill around at the line, they tend to be well rested, usually making the break fresh.
I can't tell you what the Fed is going to do or say but I can tell you I think that line/level on the yield of the 5-Year Treasury is important.
As for stocks, we reached a peak overbought reading just about a month or so ago. At the time I indicated that it was such a high reading on the Overbought/Oversold Oscillator that it was likely to be retested. That means we spent several weeks working off that extreme overbought reading.
Last week I indicated that I expected the Oscillator to "rally" again in the coming days. And it has.
Notice that the Oscillator has picked back up in recent days. I think it will run out of steam Tuesday. It appears it will do so at a lower high. That will be our first loss of upside momentum using this indicator.
Now let's move on to two interesting sentiment readings we had on Friday.
The ISE call/put ratio chimed in at 151%. I consider readings over 200% extreme, but 151% caught my eye because it is the highest it's been since Nov. 30, which you might recall was not a great time to get long stocks.
Neither was Sept. 20, when it was 201%. Nor was Aug. 17 when it was 213% (the Russell 2000 and breadth topped about a week later). I bring this up because this is the first time this indicator has gotten even remotely giddy since the rally began.
The other sentiment reading is the put/call ratio for the VIX fell to 14%. Readings below 20% tend to be extreme in that far too many calls are being bought relative to puts, meaning folks are betting on a higher VIX (lower stocks). This is the lowest reading we've seen since Jan. 8, 2018. The Russell topped out about a week later and the S&P about two weeks later and as we know the VIX went wild. But in the near term there was a stock rally.
Three other times it fell under 20% in 2018. They were all 16%.
Early May (blue arrow) came after the market had been down so it makes sense the trend followers were looking for more and thus they were wrong. This chart of the S&P, below, shows it was the low.
The late July reading is a bit more akin to now because it came after a weeks/months long rally. You can see the VIX call buyers were right because the S&P retreated over the next few days before going up again.
The last 2018 reading was on Dec. 21. Keep in mind the S&P fell 60 points the next trading day before it launched to the upside.
So, May and December came at market lows. July came at the highs. If I had to say which of these was closer to I would go with July for obvious reasons.
I will conclude with the fact that the number of stocks making new highs increased impressively on Friday, the most since last summer. So, while sentiment is clearly elevated breadth continues to perform well.
While we should lose some upside momentum this week, until breadth rolls over the market gets the benefit of the doubt.