The next big move should be up

Herd’s sentiment for the market is a rather interesting story to read. As with anything in the world, they go like a cycle from top to down periodically that will never change. The interesting part of sentiment is that herds seem never learn from the past and they will almost always be happy or depressing at the wrong time. They will be extremely euphoric when something is at the top on verge of falling or very depressed at the bottom when a turning point is just around the corner. As such their sentiment is always a great contrarian indicator. This time, herds are sending another signal that the long term bond yield should go up as the next big move.

Since the beginning of the year when the general sentiment was very depressing, I have been arguing that the long term Treasury bonds have a much better chance to go up with the interest yields going down (an inverse relationship between the two). I have said that the 10 year interest rate would likely not go beyond 2.65% in the near term but the odds are good for it to go down towards low 2%. The 10 year interest indeed has touched 2.6% at its top a couple of months ago and then has been relentlessly going down around 2.1% at the moment (a 20% drop within a few months). Traders are chasing up the government bonds now, shifting their depressing sentiment towards rather euphoric sentiment. I was even thinking that the interest rate could go down below 2% but maybe this won’t happen again when I see how excited traders have become towards government bonds now. It seems they have totally changed their mind now, becoming extremely positive for more gains from Treasury. When this happens, it tells me the upside for Treasury is likely limited but the downside risk is much higher now. I cannot tell the exact time point of course but I bet the interest rate’s next big move will be up in the months ahead. Accordingly, long term Treasure like TLT should go down or the inverse ETF like TBT should go up. We will see how it will play out.