The Long Bond vs. US Equities: Is One of These Markets Lying?

Wednesday's update ended with the conclusion that I was "near-term bearish with a chance of bigger thunderstorms."  The S&P 500 (SPX) failed to make a new high in the two sessions since that update, so the "near-term bearish" call was a hit; today we'll look at some of the key levels which should help indicate if those "bigger thunderstorms" are going to show up or blow over.

Let's talk about the bull case first, which is pretty simple:

1.  It's a bull market.
2.  Virtually all the major equities markets are still within long-term technical uptrends.
3.  It's a bull market.

Now for the bear case.  I monitor anecdotal sentiment with some frequency, and one thing that should bear consideration is the about-face so many traders have done from bearish to bullish in such a short time.  Many traders were extremely bearish at the recent bottom, as I wrote about at length back on April 15:

Bears may want to stay on their toes right now, because the charts have reached a technical inflection point, and it's significant.  Here I'm going to briefly digress from the technical discussion, but I'll return to it in a moment.

Digression: The herd is getting awfully bearish lately.  I've seen more "crash" articles show up over the past week than I have in a long time.  What's troublesome for bears isn't that these articles are being written, it's that they're being read.  Admittedly, this is very anecdotal -- but I write about this stuff, so I've picked up a thing or two over the years regarding mass sentiment and the popularity of articles.  Thus the current popularity of crash-type articles bothers me a bit because, from the perspective of market timing, the majority rarely read hardcore bear articles when they "should" -- instead, when they should be reading bear articles, they read bull articles; or articles about flowers and cute fluffy kittens (not necessarily in that order).  They usually want bear articles right before a bounce is due.

As noted, many of those same traders are now very bullish -- right as the market is hitting intermediate resistance.  I've been observing sentiment throughout this entire bull market, and this is the fastest I've seen sentiment reverse with this level of conviction.  I assume it's because, at this point, "bullish" has become a Pavlovian response for traders.  The market has recovered from each and every prior decline (that's what bull markets do, after all), so traders are finally programmed to expect it.  It's interesting to me because, in the instances prior to this, the market has recovered by climbing the proverbial "wall of worry," and has rallied into heavy trader skepticism.  It seems that this time, it's rallying into hope.  People are literally scared to be bearish -- and that's the type of mentality we see near tops (at bottoms, it's the same thing in reverse: folks are scared to be bullish).  I, of course, can't promise that the market is building a top, and I remain open to both bull and bear possibilities at the moment.  But here again, I felt it worth discussing.

One of the charts that continues to keep me on my toes in equities is the 30-year bond (USB).  The long bond has recently broken out over resistance and, barring an immediate whipsaw, looks to be headed toward my February targets.  Sometimes when bonds turn bullish, equities turn bearish, so this chart leads me to wonder if there will be a shake-up in equities in the reasonably near future.

As noted last update, SPX is at an inflection point, where it has to decide if it wants a five-wave rally, or if it's already completed a three-wave rally.  Though not shown on the chart, keep in mind that fourth waves are often complex, and a fourth wave could continue modestly lower without creating any technical issues.  I suspect there's more downside in store, at least for the near-term.

There's nothing new to add on the long-term SPX chart, but it's shown again for reference purposes:
 

In conclusion, nothing of intermediate significance has happened since the last update, so there's little to add in that regard.  I suspect there's more downside in store for at least the near-term, and a breakdown at 1870 does have the potential to generate bigger fireworks in SPX.  Trade safe.

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