Written by John Lounsbury
We have lamented that the bond market was showing no support for recent rally days for stocks. See Over the Cliff. That changed Friday.
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On Monday evening we observed (see graphic below quote):
There seems little technical support for yields above about 2.55% and based on the current view we could go below 2.50% to reach firmer support.
We also observed:
It’s an added point of significance here that the bond rally has occurred on days when stocks were also up. This can be interpreted as an indication of lack of conviction for stocks because if there was support for stocks we would expect to see money rotating out of bonds (yields going up) and into stocks.
Instead the up days over the holidays has come on very thin volumes and cannot be considered the start of a serious rally.
If this assessment is correct, Wednesday could be an ugly day for stocks on higher volume and bonds could continue to rally.
It turned out that Thursday, not Wednesday, was the really ugly day, with stock indexes declining 3-5% and the 10-year bond closing up to yield 2.56%, right above our estimated first weak support level.
Friday reversed the Thursday stock losses. And even more importantly bond traders showed commitment to stocks with a sharp sell-off in fixed income. The 10-year yield rose, more than reversing Thursday’s move, to close at 2.67%.
Early next week will be critical in deciding what is likely for the next couple of weeks. If the rotation out of bonds continues for any positive day in stocks, we may be in at least a short-term stock rally.
But if we have an up day for stocks Monday, Tuesday, or Wednesday and bond yields rise the same day(s), the likelihood that a sustained rally for stocks is underway becomes much less.
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