Posted on Reddit by /u/spontaneousdisorder

Last November I wrote “Gold declined over the summer and looks oversold in the medium term.” Now it looks as though gold is overbought.

I’ve seen some bullish stories surrounding gold recently, now is not a great time to be getting bullish on gold. Momentum is strong but sentiment is very bullish. It appears to require a least a pull back soon but might be making a significant top.

The daily sentiment index has reached an extreme…

Hedge funds are also betting heavily on gold. They are usually wrong at major turns. Gold could still go a bit higher, we’ll see.

Bitcoin is also surging and as I’ve noted before I think Bitcoin tends so do well when investors are predisposed to speculate. So its no surprise that bitcoin bottomed close to stocks around the start of the year and is now surging along with the stock market. This helps confirm the markets are very much “risk-on”

Bitcoin (purple) S&P500 (blue)

Sentiment towards the stock market was extreme this year and US stocks have rallied yet again to near record valuations. This triple+? top formation at these valuations is unprecedented.

US STOCK VALUATIONS

With this sort of persistence we can only wait for the market to finally crack. So lets look at bonds and see if there is indication the cycle is coming to an end…

Sentiment toward bonds has been extreme bullish as investors bought them up globally producing a record in negative yielding bonds. Bloomberg even warned investors to “Sit Out the Treasury Rally at Your Own Risk” in a recent top headline on their website. This is typical sentiment of a top in bond prices.

Daily sentiment index for T bonds

Remember — as bond prices go up the yields go down

Inverted yield curves are the best predictor of recession we have (see /r/economiccollapse wiki). But the recession actually begins when the yield curve steepens again and short term rates fall. As you can see the curve is still inverted but short term rates are falling. Since long term rates are falling as part of this bond rally the curve has remained inverted. But should the price of bonds start falling (as we predict), yields will rise and the curve will steepen. The stock market will probably turn at around the same time as the stock market usually tops before the start of a recession.

US yield curve

3 month T bill (red) and fed funds (blue)

You can see the short end of the yield curve here represented by the red line (3 month t bill). The Feds rates follow the t bill. The recent rally in all these markets was partly spurred by the Feds shift to an easing stance. However such rallies aren’t durable. Rates fell along with the stock market in 2007/2008 and the same should happen this time around.

Once the stock market is falling significantly and the yield curve steepens I’ll probably post again predicting recession!