May 7, 2021
Good morning,
Remember that monster million plus April employment number expected this morning … it printed 225. That’s why bond yields haven’t budged this week and are now down to 1.53% on the 10yr. Oh well, the crowd got a little ahead of itself. The booming re-opening economy continues – no worries to that.
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For newer readers of these notes, allow me to briefly level-set by way of review. Technical/Quantitative Analysis incorporates four fields of research of financial markets ; Macro Economic Research, Fundamental research, Technical Research and Behavioral Research. TQA has three rules to live by, and long term readers have read them here ad nauseum; 1. Don’t Fight the Tape (technical), 2. Don’t Fight the Fed (macro & fundamental) and 3. Beware of Crowd Psychology at Extremes (behavioral). #3 is commonly referred to as sentiment, and gets the least coverage in these notes because extremes are rare and typically only register near market tops and bottoms.
It’s axiomatic that crowd psychology is a major influence on markets and economies. At extremes, the clues offered are valuable (not a guarantee) in telling us where most markets are in their cycles. Sentiment indicators can register significant crowd psychology well in advance of a top or bottom. It can be useful however because many institutions need to be aware of high or low risk junctures, before the turns, to be able to act effectively. Sentiment is often referred to as a “get ready to act alert” and the strictest interpretation of rule #3 above is to go with the crowd into an extreme until it reverses. It is the reversal from an extreme that is the timing signal.
Most hard data sentiment indicators on crowd psychology have shown an excessive amount of optimism for a while now. However, one missing link, was consumer confidence regarding the economy. Last week, the Conference Board released its monthly Consumer Confidence Survey and it filled the gap. As measured by the survey (soft data), economic growth, housing, and the unemployment rate all recorded new highs or record all-time highs.
The Tape and Fed have kept us invested in this bull market and now it looks like we are running with the crowd – a get ready to act alert has been registered. Are we days, weeks, or months away from the reversal signal? I don’t know, bit I think it’s nice to know where we are in the cycle – probably days, weeks or month away from the top. Have a nice weekend.