Short Take: Watching The Action in Bonds

Make no mistake about it; the key to market analysis at this time is the action in the bond market. After surging since the election, the yield on the 10-year is pulling back a bit this morning – albeit ever-so-slightly. And with the bond market in one of the most overbought conditions seen since the Credit Crisis ended, a pullback in yields is to be expected after the recent move.

Technicians know that after a big move in one direction or the other, “the action” during the counter trend move is usually very telling. In this situation, if the anticipated rally in bond prices (and corresponding decline in yield) is short-lived, it would be a sign that more downside action is ahead and that investors are using any strength as an opportunity to sell. But if the rally in bond prices gains traction, it would suggest that the recent surge in yields has been overdone and that the “discounting” of future expectations related to the “Trump Trade” may be nearing completion.

The distinction here is important because of concerns about the possibility of a “sea change” taking place in bonds. Lest we forget, bonds have been in a secular bull market now for some 35 years. And since a reversal of this trend could cause any number of unexpected consequences for investors of all shapes and sizes, this remains something to watch for.

The next important question is whether or not an ongoing decline in bond prices will impact stocks. We shall see.

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

    1. The State of the “Trump Trade”

    2. The State of Global Central Bank Policies

    3. The State of Global Economies

    3. The State of Interest Rates

Thought For The Day:

You cannot escape the responsibility of tomorrow by evading it today. -Abraham Lincoln