I look at sentiment in Fed analysis like a pendulum, one that swings from an excessively hawkish interpretation of the Fed’s stance at one end to an excessively dovish interpretation of the Fed’s stance at the other. Back and forth. Over and over again. The amplitude of each swing varies, as can its length. But the back and forth is always there, oscillating around the unobservable notion of a moving center of gravity. If you get good at gauging where we are in this process, you have a real leg up in bond and currency trading.
Access all of BehavioralMacro's premium content and the private Twitter feed via Premo
Not a subscriber yet?
Please subscribe to access the premium content.
It’s obviously not easy. But it can pay off well if you keep your losses small all the times you’re wrong, and really push your advantage when right.
Right now, I think the pendulum started swinging a few weeks ago away from an excessively dovish take on the Fed and too much fear of worsening slowdown. It had reached a local extreme and started swinging back.
The question at this point is how much farther should we expect the pendulum to swing back?
As a proxy, I’m using the 10yr UST futures. On the 5yr chart, you can see that if we continue the pattern of the last few years, this local lower high would lead to a lower low. My trading conclusion is I wouldn’t want to bet on the 10yr UST future falling quite that far, but I would expect it to fall further–maybe a lot–from here in the context of a pendular swing. After all, these pendular swings typically last many months, and this one only started a few weeks ago.
However, in the short term there is significant support right around these levels, as you can see in the 1yr chart of the 10yr UST futures.
It may turn out that the news is so bullish and/or the positioning so wrong-footed that we cut right thru the red area and proceed lower as the pendulum continues to swing back. Or maybe not.
Either way, the broad direction for precious metals and currencies in the near term is likely to depend on how this pendular swing in bonds plays out.