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May 03

The Market Today 5/2/14: Fight

Fightfight

There seems to be a fight going on! The question is, what fight am I referring to? Is it Russia and Ukraine? The one going on between my two young boys? How about the one brewing between the Minnesota Wild and Chicago Blackhawks? None of these. I am referring to the one between the stock and the bond markets. I along with 99.9% of Investment professionals, believed that the bond market rally was over, and that we would see yields moving to the upside this year. What we have seen, is quite the opposite. In fact, the bond market has rallied about 10% this year, far outpacing the stock market so far this year! Who saw that coming? Not me, I can tell you that. Despite the strong rally in bonds, the stock market is close to hitting yet, another all time high! For the trend to continue, we do need to see the S&P 500 to break above 1,897 soon, preferably this week. The strong bond market rally in the last two days is deeply troubling to me. The bond market is typically known as the smart money. With the stock market flirting with new all time highs, why is so much money making it’s way to the bond market, pushing yields sharply lower? I have heard a plausible explanation, listening to Rick Santelli on CNBC yesterday, pointing out that Japan was closed, and money needed a safe place to be in on the short term basis. This may be true, but that isn’t what troubles me. This sharp move in bonds is telling me that trouble is lurking. The bond market knows something, I just don’t know what it is yet. I feel that the bond market will reveal what it knows in the not too distant future. Whether it is the escalation between Russia, and Ukraine, worsening economic conditions, or another reason, we will find out soon!

Fight: Stocks

Let’s face it, there is a lot of noise out there. This past week, we had to deal with the Fed Announcement of monetary policy, the employment numbers, and of course, the Russia and Ukraine situation. Despite the sharp rally in bonds, we continue to see the stock market grind higher. We have yet to take out the all time high in the S&P. We did hit the all time high in the Dow Jones Industrial Average. The levels to focus on this week in the S&P are 1,897, and 1,872. The market may indeed stay range bound between those two levels. However, should either of those numbers be taken out, that is the way the market will go. If it breaks to the upside, add to your equity exposure. Should it break to the downside, time to get defensive. The fight going on between the bond market and the stock market, has participants on edge. There is great uncertainty, and presents a very difficult trading and investing environment. This is the time to exercise great caution.

Fight: Bonds

The real action this week was in the bond market. As I mentioned above, we have seen a sharp rally in bonds, pushing the all important 10 year yield hit as low as 2.57, before settling at 2.59. The fight going on between the bond and stock markets is telling us to be careful. Generally speaking, when bonds rally, stocks fall. The vice versa is true as well. This week, both have rallied. The stock market seems to be grinding, and has not taken a new all time high, at least in the S&P. The real tell here, for short term direction in stocks, is the 2.57% level on the ten year. If this is taken out to the downside, I would expect stocks to begin to fall. Should the stock market begin this fall, without making a new all time high, then the trend in the stock market may be changing.

Author Sean Rhodes is an expert in financial markets and helping you manage your money. For a no-risk consultation, check out Sean at the following link for more information and expert advice on investing in equities and helping clients navigate the fight between the stock and bond markets!

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