Bonds Technical and Sentiment Picture

Following post was written on Sunday night but was not published due to logistic reasons. Yesterday's market action has further solidified the rally argument. It could have far reaching consequences for the stock market (we will discuss those later). In the mean time, I would like to again humbly Thank God, who enabled the IPM Model to predict this decline in the stock prices and allowed us to stay out of the market. IPM Model predicted the bottom at the next IPM Turn window in January, after which all of the subscribers exited the market, with  a goal to buy back at lower prices. Past reports will be published in March. (Subscription Information)


For the last few days, we have been discussing the Bond market. Bond prices bottomed on Feb 1, 2013, and have since been going sideways. This sideways action can mean two things:

1- Market is getting ready for another decline

2- Market is tracing out a base before breaking out.

In order to better understand bond market's recent price action, one should look at the bigger picture and the long-term bond market structure.

Long term Structure:
Long term Bond market structure clearly shows that Bonds have been declining since July of 2012 (almost the same time when stock market started going up in summer). This decline has traced out a clear 3-wave (A,B,C) structure. Furthermore, the structure is not impulsive at all, with wave A sub-divided into 3 waves, wave B sub-divided into 3 waves and wave C ongoing. As we know that 3-waves are corrective in nature, therefore, it is highly likely that the Bond market will very soon complete its correction (might have already completed its correction) and start a sharp rally.

Near term Structure
Their are two alternatives:

1. Bond market has traced out a ABC correction to the upside since early February. Within this correction every wave is sub-divided into 3 waves. However, the sub-component of C-Wave have the following composition (A=5 waves, B=3 waves, C=5 waves). This would mean that we need another decline to complete the long term structure. 
2. Bond market has just completed a series of 1's and 2's, and will soon start rallying sharply in wave 3 of 3. This wave count is based on the bond market tracing out a series of 5 waves in up moves since Feb 14, and tracing 3-waves during corrections.This alternative is supported by the pessimistic sentiment towards bonds. 

Critical Level:

Bond market should not break below Feb 14 lows to hold the rally assumption.

Sentiment:

The sentiment picture towards Bond's prospects if very grim, which suggests that there is a lot of fuel to propel a bond market rally. One of the biggest argument that we have been listening to in regards with the new Bond Bear Market is related to the concept of "The Great Rotation." According to this argument people will start taking their money out of Bond funds and will put in stock funds, which will result in a decline of the Bonds and rise of the Stocks. However, this argument is not only flawed, it is a great contrarion indicator because when every one accepts a reasoning, it typically fails to materialize. We have discussed Bond market impact in detail in the following post:  

What Great Rotation?

Secondly, recently FED stated in its minutes that they will start debating their QE infinity program. This announcement sent both Bonds and Stocks down. However, this announcement can be taken as a contrarion indicator on the part of the Bond prices. As many investors are assuming that FED's exit from buying bonds will be negatives for the Bond prices and hence selling their positions, this announcement might be a contrary buy signal. We have discussed FED's impact on Bond and Stocks in detail on the blog here:

FED's Minutes: Bonds or Stocks?

The commitment of traders data of the Bond market suggests that Commercial Hedgers (big banks) are net long and Large Investors are very short. The Large investors have historically been wrong about the market's direction. Therefore, this is another catalyst t propel the Bond market rally.

Finally, Bond sentiment as measured by several sentiment measures is at multi-year low, with a composite measure of surveys recording among the lowest bullish opinion in a decade. This observation is again very bullish for the Bond market.


Conclusion:
Pessimistic sentiment in the Bond market supports the Bullish argument. Therefore, we should be vigilant of a new bond rally, with pre-defined risk above the critical level.

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