"In short, markets were overly skittish into the election and the big flush on election night cleared the way for what the presidential cycle forecast should happen; and that is for the last 2 months of the election year to be bullish. And here we are, complete with dumb money eating up stocks and puking out bonds."
It is the last sentence that is of interest for this week's eLetter. Overly sensational subject line aside, long-term Treasury bonds are making a contrarian setup when viewed from a sentiment perspective.
Sure, T bonds are in bearish technical trends and appear to be a fundamentally unsound asset class, given the decades old debt-for-growth regime and the would-be inflationary plans of the new administration; but when looking strictly at sentiment, long-term Treasuries are a 'buy' and a good, risk 'off' way to hedge stock positions while paying out monthly income (unlike shorting stocks).
Let's first look at public sentiment toward the 10 year Treasury. Do you remember last summer? That would be the time frame that global NIRP (negative interest rate policy) was being promoted in the financial media. What happened last summer? Why, people herded into Treasury bonds in a risk 'off' frenzy, bought bonds at ridiculously low rates of interest and then got blown up for their herding behavior. The bond has dropped ever since as the new promotion, rising interest rates, took hold. Last summer was a time to get risk 'on' (during Brexit) as we noted at the time.
That is what the dumb money is doing. Now what about those considered the smart money, the Commercial Hedgers? Why, there they are taking the other side of the trade once again. After positioning net short during the NIRP/Brexit hysterics, they are now in a strenuously bullish alignment: