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At some point all market participant agree

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One could say that every day there is disagreement in the market. One selling transaction is offset by a buy transaction, but I feel that there is a "finite point" where the market flips and the bulk of the market participants agree on future direction. Currently, I think the agreement on direction remains "downside," but that doesn't mean that this agreement is about to change. I'm going to display a chart of the 5-year YIELD. It's a chart that subscribers who have been with us for sometime will recall. It's the chart of the 5-year YIELD, but we're going to look at it on a weekly interval. I still find it the most fascinating of "market psychology" indicators that you can monitor with relative ease.

5-year Treasury YIELD ($FVX.X) - last three years

The above chart is kind of how I view the "cycle" of market psychology. I'm looking for the 5-year YIELD to try and sustain itself above the 5% YIELD level. You can see how this 5% YIELD seems to have been a place that MARKET participants have been attracted too since late last year. This is what has stalled rallies in stocks. Investor/MARKET psychology has preferred the safety of the 5% YIELD in this bond over stocks and has been willing to sell stocks in order to get it! Eventually this will change, but we never know just when it will occur. Once we do start holding above that level, look for market psychology to change and start becoming more positive. If you're an equity bull you suddenly realize just how early we would be if such a shift is occurring. Notice the big YIELD change in the past week for the 5-year YIELD! And many media reports thought that market psychology might be disappointed with a Fed rate cut of just 25- basis points!

For now, traders should remain cautious in their bullish trades and bearish traders should be using tight stops. When the market psychology "flips" that's when a bullish trader want to get more aggressive on the buy side.

Smart money will continue to short until it loses! Once smart money starts to lose, then it turns to the buy side! Smart money isn't always right, but smart money doesn't stay wrong for long. I'd expect "smart money" to once again buy the 5-year YIELD when it gets close to the 5% level and smart money will probably sell stocks again. What creates the "flip" is when the smart money sees YIELD continue to rise and stocks continue to rise in price. That's when the psychology "flips" and the new bull market for stocks continues.

We're not there yet, but we're a heck of a lot closer than we were four months ago!

Jeff Bailey
Senior Market Technician

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