Trader’s Narrative

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Ticker Sense mentioned that according to the Merril Lynch’s monthly survey, investors’ optimistic sentiment is now down to six month lows. As well, 70% of those polled said that they expect inflation to rise this year. “This is the highest level since March 2005 which coincided with another short-term spike in interest rates.”

I’m not surprised at all to hear that since I mentioned previously that according to the COT and other techincals, the yield of the 30 year Treasury bond is headed for a tumble.

The sentiment on inflation also dovetails nicely with something else which has already started to play out: the weakness in gold stocks. According to the k-ratio, gold stocks were rather stretched and were headed for a tumble. Since I wrote about it, the Amex Gold Bugs Index has fallen from 387 to less than 340.

As you have probably surmised, these two seemingly separate markets are actually very much related because they both key off inflation.

In fact, if we compare the the Amex Gold Bugs Index and the 30 year Treasury bond yield, we see that around March 2005 (when inflation fears were as prevalent as now) they both made an intermediate top.

For many, this intermarket relationship is a fact and therefore assumed to be a give. Yet, for me it is fascinating that different technical tools can, in the end, guide us to the same conclusion and in essence, reiterate the relationship.