Few asset classes are as despised as bonds. That is a good thing though. Remember once everyone hates something, they have probably already sold – leaving nothing but buying pressure.
Getting right to it, longer-term bonds look very nice here. The TLT is a good way to gauge this and it just made a nice looking double bottom with improving technicals. Here is what I’m seeing.
Also, on a longer-term basis the TLT just found support from its 80-month moving average.
Trust me, I know that sounds random, but we’ve seen time and time again 80-unit moving averages can have significance. Check out what gold just did at its 80-month moving average.
Then look at the SPX with a weekly 80-week MA. Not perfect, but not the worst bull/bear indicator I’ve ever seen.
So ok, the technicals look good. But what I really like is sentiment is off-the-charts bearish on bonds here. That is a recipe for how explosive surprise moves can happen. Below is the Consensus % bulls on bonds. It is down near the early 2011 lows, which was a major buying opportunity for the TLT.
We don’t have what happened in September yet, but there has been some huge selling in bond mutual funds the past three months. Again, this could be the panic that is needed to form a major low.
Building on this, a recent Bank of America Merrill Lynch poll showed a net 68 percent of investors are underweight bonds, the lowest since April 2006.
Lastly, looking at the Commitment of Traders (COT) report on the 10-year note, we see that Commercial Hedgers (smart money) are very net long, while Small Traders (dumb money) are very net short. Another nice sign if you are longer-term bullish bonds here.
So do you go out and buy right here? That depends on your timeframe. Bonds have had a nice move, so maybe a little pullback is in the cards. Still, from a longer-term point of view I like the price action and love the negative sentiment. It all adds up to potentially a significant surprise bond rally over the coming months.