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Bullish for TLT and bearish for GLD...

ANNANDALE, Va. (MarketWatch) -- The psychologically easy thing to do right now is to be bearish on bonds and bullish on gold.


And it became even more comfortable in the wake of the Federal Reserve's decision Tuesday to hike short-term interest rates another quarter of a percent. In announcing the decision, the Fed's Open Market Committee felt compelled to say that inflationary pressures are heating up. (Read full story.)

And, needless to say, increased inflation is good news for gold and bad for bonds.

But there's something a little too neat and tidy about this narrative. Being bearish on bonds and bullish on gold is a bit too comfortable.

Making money is rarely that easy.

Consider the latest readings from the Hulbert Bond Newsletter Sentiment Index (HBNSI) and Hulbert Gold Newsletter Sentiment Index (HGNSI). These two indexes reflect the average recommended exposure to the bond and gold markets among a subset of bond and gold timing newsletters tracked by the Hulbert Financial Digest.

As of Tuesday night's close, the HBNSI stood at negative 56.8 percent. The negative reading means that the average bond timer in this index is short the bond market. In fact, the current level equals this index's all-time low. Never in the years of our tracking this group of bond timing newsletters have they been more bearish than they are now.

In contrast, the gold timers are extremely bullish: As of Tuesday night, the HGNSI stood at 71.4 percent. That's within shouting distance of this index's all-time high reading of 89.6 percent.

From the point of view of contrarian analysis, these readings suggest that bonds are more likely to go up than down over the short term -- and that gold will do the opposite.



Over the past four years, for example, the HBNSI has dropped to this low a level just five times. Within the weeks following each of those occasions, the bond market staged a significant rally.

The most recent occasion on which the HBNSI was this low was last May 14, nearly a year ago. Over the subsequent four months, the government's 30-year Treasury bond rose by 10 percent.

Almost the precise opposite story can be told about gold sentiment. There has been only one other occasion in the past several years when the HGNSI was higher than where it stands today. That came at the end of this past November, when this index rose to 78.6 percent. Over the subsequent 2-plus months, gold fell by around 10 percent.



As always, of course, there are no guarantees. Sentiment is not the only thing that makes the world go around, and it is certainly possible that bonds will continue to decline in the face of extreme bearishness among bond timers -- and for gold to go up in the face of near-extreme bullishness among gold timers.

Nevertheless, sentiment is a powerful in the market, particularly over the short term. That's because investors almost always overreact, even when they correctly identify the market's trend.

At a minimum, therefore, the contrarian bet right now is that investors are overreacting now in both the bond and gold markets