Even if bonds drop, stocks could still rally, right?
Long-term bonds had a heck of a run in July and August, with the 30-year bond futures suffering a lower daily close only 12 times during the entire two-month period.
They've backed off a bit this month, but I haven't seen the possibility of higher rates trickle through to many investors just yet.
The chart below shows a composite sentiment score that we compute for long-term bonds. On the chart, I've put red and green arrows highlighting times that I saw truly excessive optimism (red arrows) or pessimism (green arrows).
While surely not perfect, I did generally see bonds back off after highly optimistic readings, and rally after the opposite.
In the waning days of August, the score reached one of the most optimistic (i.e. overbought) readings in the seven-year history that my firm has for it. While rates have ticked up a bit since then, the score has not budged, and remains in "danger" territory.
The score incorporates nothing concerning the fundamental or technical outlook for bonds or the economy – it is purely sentiment-driven. So it's always best to fold something like this into a more comprehensive analysis, but on the surface at least, this one leg of the stool looks pretty wobbly.
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