http://www.marketwatch.com/news/yhoo/story.asp?guid=%7B3BBDEC1B-8C86-4212-B091-E3639C1B92B1%7D&siteid=myyahoo&dist=myyahoo Bond sentiment so bad, it's good By Mark Hulbert, CBS.MarketWatch.com Last Update: 12:21 AM ET May 28, 2002 ANNADALE, Va. (CBS.MW) -- Sentiment is fast approaching a bearish extreme among bond-timing newsletters. From a contrarian point of view, that's bullish. The Hulbert Financial Digest's bond sentiment index currently stands at -53.8 percent. That's only a couple of percentage points away from the index's record low of -56.3 percent. This HFD sentiment index to which I refer measures the average bond market exposure among timing newsletters that communicate their thoughts daily with their subscribers. The latest reading incorporates advisers' reactions through the close of trading on Friday. This very low reading stands in stark contrast to the sentiment picture that which prevailed two weeks ago, when I last wrote about the bond-timing newsletters on May 15. Then the HFD's bond sentiment index stood at 1.3 percent. In other words, this index has slipped more than 55 percentage points in less than two weeks. Contrarians almost always think it is bullish when advisers are falling over themselves jumping on the bearish bandwagon. But such behavior is seen as particularly bullish today, in light of bonds' recent strength. Over the last two weeks, in fact, the nearby T-Bond futures contrast has recovered much of its early May losses. Usually bond sentiment drops in the wake of market weakness. When it instead drops in the face of market strength, it betrays a thoroughgoing despair on the part of market timers. This very well may be the wall of worry that the bond market needs in order to climb significantly higher._________________________________this is something i had noted and commented on within the past few weeks. All of the fear about buying long bonds makes me wonder if maybe the fear is a little overdone... how can everyone be right? Contrarians would point out that they are usually wrong whenever the opinion gets too lopsided. However there are few contrary indicators of which I am aware when it comes to bonds, unlike stocks. This Hulbert newsletter survey sounds like an interesting and potentially useful measurement. -hack
Let's see. The commentators on the commentators are saying that the market is saying X, therefore -- if one is a contrarian--, then not-X must be the case, right? But if one is truly a contrarian's contrarian, then, of course, X is the case after all. LOL. Way above my pay grade. Charlie
Let's see. The commentators on the commentators are saying that the market is saying X, therefore -- if one is a contrarian--, then not-X must be the case, right? But if one is truly a contrarian's contrarian, then, of course, X is the case after all. I just see it all saying that if a lot of commentators and market participants are saying that the long bond is headed down and it is a rotten time to buy, one can easily surmise that they already would have taken positions based upon those opinions. If that is true, then the selling may already have occured and the potential surprises could be on the upside, especially with expectations being so low.I honestly don't know if contrary opinion indicators can be successfully implied with bonds the way they can with equities. it seems reasonable enough though. A lack of disagreement usually indicates a probability that is being mispriced by market participants. It takes lots of informed and motivated buyers and sellers to have the most efficient marketplace. When either side gets too anxious, opportunities may arise. That is my operating hypothesis, anyway.-hack
I'd be wary of taking contrarian positions WRT bonds. In equities, nobody HAS to buy stock (aside from index funds). In contrast, there are an awful lot of financial institutions that pretty much have to buy bonds (or fairly similar stuff like mortgages, etc.). I'm thinking particularly of insurance coompanies, pension funds, etc. These entities are managing huge amounts of funds and can easily prop up a bond market even when it is pretty clear that what goes up must come down. Furthermore, they don't really care if their long bods go into the crapper because the value of their liabilities will also decline (assuming that they are being good about duration matching, etc.).
I honestly don't know if contrary opinion indicators can be successfully implied with bonds the way they can with equities. It seems reasonable enough though.Hack, let's pursue that thought a bit further. How are stocks and bonds similiar (or different) from bell peppers and broccoli? Are all four subject to the same supply/demand dynamics? or, are securities a bit wierd because of the anticipatory nature of financial markets, such that the operating principle seems to be "buy on the rumor; sell on the news" and the fact that consumers do make grocery substitutions, but not financial ones? E.g., when fresh broccoli is higher than usual, perhaps due to bad weather, you switch to cabbage or whatever for a week or so. But if XYZ is the hot stock, as is evidenced by the fact it is going up, or fears are fanning a retreat to quality, then the fact of the stock's strength or the bond's safety creates desirability and everyone wants a piece of the action and pays the higher price.Against that background, let's ask your question of whether :... it is a rotten time to buy[?]"time" is the operative word in that question. What is your investment time frame? Pick the right time frame, and you can make almost any investment work, but will it be the best investment compared to other opportunities, all other things being equal? [which, of course, they never are.] But, what are the qualities of safety and return that you require from bonds and can substitutes be found if the current prognosis for interest rates is at best uncertain? Rather than try to solve a timing problem that even the pros agree is all but intractable, why not do the commonsense consumer thing of side-stepping the issue until things resolve themselves? If bonds are expensive and their direction is uncertain, create synthetic instruments for your portfolio that will achieve the same purpose. Charlie
Food exists to be consumed.Stocks exist to be a store of value that you must eventually sell to someone else. No defined expiration.Bonds exist to play games with interest rates. They have a definite time to expiration. You get use (coupon payments) out of a bond while you hold it.Within one credit rating, one bond is more or less interchangeable for another (if your portfolio is diversified enough). Not so for stocks.Hey, I just made the case that bonds are consumables!
Within one credit rating, one bond is more or less interchangeable for anotherKeep in mind, however, that the futher away from AAA you move, the less interchangeable those corpoate bonds become and the greater importance that has to be given to company-specific factors. Also keep in mind that even AAA issues default (though rarely) and they get downgraded (a more frequent event). A rating from Moody's, SP, Fitches, etc, is only an opinion of credit-worthiness and the likelihood the company will fufill its promise, not guarantee to pay interest and return principal. Only the governement guarantees its debt issues.if your portfolio is diversified enough). jrr7, I think that qualification contradicts the first half of your assertion. Either an issue is interchangeable, or it isn't. If you have to depend on diversification to bail you out of mistakes, then the issues weren't interchangeable. Issue A failed, but Issue B didn't. In my opinion, only guaranteed issues are truly interchangeable. Everything else is a calculated gamble against which good Due Diligence and Proper Diversification are the only defense. Charlie
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