While equities have been selling off, the price action in fixed income has been the real show in the last week. The 30-year and 10-Year Treasury bonds haven’t seen moves like this since 2008. In fact, the 14-day Relative Strength Index (RSI) for the 10-year hit its lowest level on March 6th since 1971.
With the move on stocks and bonds, their Daily Sentiment Index (DSI) % bullish scores have hit historic levels. As of Friday, just 8% of futures traders (what DSI seeks to measure) were bullish on the S&P 500 and NASDAQ 100 while 98% were bullish on the 10-year Treasury bond. This creates a spread of 90 points, the highest since 2014 and 2011, and a level we didn’t reach at the bottom in December 2018 or during the Great Financial Crisis.
Relaxing the parameter to at least an 88 point spread, the chart below shows prior occurrences since 2007. As I wrote in January, when many sentiment gauges were peaking, sentiment often leads price and peaks first. That turned out to be correct in present day as sentiment did in fact peak ahead of the current down trend.
The same can often be seen at market troughs, sentiment bottoming ahead of price . Over the last ten years, when the sentiment spread between bonds and stocks has reached 88+ points, its occurred before price found a final low. The one exception was in Dec. 2018 but all the prior (albeit small sample size) saw a peak in sentiment spread and then it began to relax by the time equity indices hit their ultimate bottom.
Like in my last post, What A Persistently Elevated VIX Means For The Market, which showed that volatility was suggesting we weren’t done selling in equities yet, as of Friday, sentiment seems to be saying the same thing.
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