Category Archives: Market Commentary
For months if not years, market bears have contended that the rise in bonds shows that investors are still not convinced of stocks. Historically, rising bonds has signaled a market decline to come but the playing field has changed dramatically. When bonds rise, bond yields (or interest rates) fall. Ben Bernanke and the Fed are determined to keep interest rates low in order to assist in a housing and therefore an economic recovery.
The recent rise in bond yields shows that investors are convinced this market rally is here to stay and are pulling money out of bonds to put into stocks. Can this rise in bond yields last with the Fed determined to keep rates low? The answer is absolutely not. But a chance that bond yields fall is not a bearish thing for the market like it has been over the last decades. The reason is that the Fed will combat rising rates with further quantitative easing or QE3. This will in turn drive bonds yields lower and continue to give stocks reason to rise.
Lets take a look at the yields below. The recent downtrend was broken this month and a rally continues. One way to see that the rally is likely to continue is by looking at the performance of yields versus stocks. With the break in the downtrend of yields, yields have started to outperform stocks giving credence to the argument that yields will continue to rise. The yellow highlighted area represents the potential resistance area for bonds and the point the Fed is likely to step in at and issue QE3.
To take advantage of the rise in yields, the etf, TBT can be bought. At the point where yields start to turn lower, it can be played with the etf, TLT. Since we can never be sure of the Fed’s timing due to their increased visibility, I’d prefer to wait until yields rise further and then play them lower with TLT. Those who are much more bullish on stocks and yields than I can use the TBT to capture the profits that come with rising yields.
As the S&P 500 pushes above the psychological barrier of 1400 today, the question arises as to the future direction of the market. From a market standpoint, I am a long term bear but cannot overlook the the Fed and European support of the financial markets. This support from the Fed continues to drive the markets higher as incredulous bears look on. So where does the market go from here?
One of the common misconceptions that traders have is that when a stock nears the top of a chart it must pullback and go lower before the next move higher. Stocks (and markets) that set new highs are typically doing something right which draws more money to push the stock even higher. With a potential new market high looming, we must embrace the possibility of an even stronger move higher. Momentum (as shown by the MACD) is strong in the market and the underlying support of the Fed gives buyers great confidence.
One of the technical instruments that gives some credence to the bulls case is the Bullish Percent Index. The Index uses point and figure charts to calculate the percentage of stocks with bullish price targets versus bearish price targets. In its simplest interpretation, a 6% move higher in the index is bullish for stocks while a 6% move lower is bearish for stocks. Over the last 2 months there have been 3 bullish moves on the index of greater than 6%. Until a 6% move lower is seen in the Bullish Percent Index, the medium term momentum of the market remains higher.
Given the fundamental situation of the market, major selling is always possible. That said, the technical signs of the market remain strong. Buying stocks setting new highs is likely to continue to work as long as the market remains above the 1380 level.