Should we talk about bonds? Everyone else is. I said earlier in the week, when I noted I expected an early July pullback, that I had no idea what it was that could make the market pullback. Why? Because if I knew, it would be priced in already. Yet it turns out folks think it's bonds.
Yet bonds have been on the run since early to mid-May. You might recall I was bullish on them then; it was one of the reasons I thought tech/growth stocks would rally. So, it's not as though the move in bonds has only arrived this week. Oh sure this week has been a bit dramatic so maybe that's it.
Yet there is some resistance here if we use the iShares 20+ Year Treasury Bond ETF (TLT) . When we use just the yield, it's a similar neighborhood. But it's that the Daily Sentiment Index (DSI) has finally reached 90. On the left of the chart, you will see I have drawn in two blue arrows. I have stated a few times that I thought this move would look like the inverse of that February or March move down.
I do not think we get a dramatic shift in bonds, though. I would note how long it took for bonds to bounce around between the March low and May, before we got a really solid move. I imagine this, too, will take some time to develop. But when the DSI is at 90, I call it extreme and therefore we're closer to the end of the move than the beginning.
As for the stock market, Thursday had more crummy statistics. Breadth was poor, as it has been for about six weeks. The number of stocks making new lows expanded again. And the Russell had its fourth straight red day, something it hasn't done since late January. So, that's a change in pattern.
I do think small caps should get oversold in the coming days. Just look at how oversold Nasdaq's Oscillator is getting. That is because of the fact that the last seven out of eight trading days has seen negative breadth for Nasdaq.
As has been the case for a while, by mid-morning, the indexes stopped going down. We started the day with 95% of the volume on the downside, so that shows a minor level of panic, but it subsided as the day wore on. A few weeks ago, the put/call ratio managed to get to .97, which is panicky. This week we haven't managed to get over .90. It's almost like everyone has just accepted that mega-cap tech stocks go up and everything else goes down.
But if we can get the Russell to an oversold condition and a bit more negativity in the market (such as a high put/call ratio) and fewer stocks making new lows that would be a good set up. And if the bonds cooperate, well wouldn't that once again, catch folks off sides.