I want to preface this at the start by noting I am not an economist nor do I play one on TV. But I can look at a chart and see that the yield curve (using the 2s and 10s) had a serious move on Monday. It has begun to capture the attention of market players. How could it not?
It is said that an inversion of the yield curve (meaning it goes negative) is bearish. Many folks have gone on to note that it typically doesn't much matter for stock markets for about another year after the inversion. I will leave that to the experts.
What I know is that I have been bearish on yields (bullish on the price of bonds) since early October when the yield on the 10-Year tagged my measured target in the 3.20-3.25% area. Sure it has since formed a double top as well. That top measures to around 2.92% and the trendline at 2.90% is quite solid. So that has been my target zone for this move.
I obviously cannot say what will happen to the yield curve but I can tell you that the Daily Sentiment Index on Bonds now stands at 86. As a reminder readings over 90 are typically bearish. In this case it would mean being bearish on bond prices, believing yields are going up. Should bond yields fall into that target zone I would look for the move to be done. Alternatively, should the DSI scoot over 90 on any move in bonds I would have to think this particular leg of the move is about done. In other words, now is not the time to start loving bonds.
As for stocks, let's talk about the upcoming overbought reading. Using the Nasdaq Momentum Indicator we show the Momentum Indicator reaching an overbought reading on Tuesday and again on Friday. Due to the holiday midweek this week, it gets a bit funky but suffice it to say that by Friday it will be maximum overbought using this metric.
Using my own Oscillator I too come up with a maximum overbought reading on Friday.
Sentiment wise the put/call ratio was 76% for the second day in a row. The put/call ratio for ETFs was under 100% for the sixth time in seven trading days. The last time it was this low (61%) and had such a long string of low readings was the same time last year. Once again, notice that the result of this was a week of volatility.
We climbed thereafter and then for two weeks we went sideways again.
The intermediate term indicators are still rising and are not yet overbought. I think we can see a bout of volatility as we get overbought this week (as we did last year) but we ought to have another rally attempt thereafter.