Wednesday, March 14, 2012

Bond Yields Head Higher Despite Successful 30 year Auction; Stocks Ride Intraday Roller Coaster

After hitting multi-year highs the stock market went into a volatile intraday session. Volume ended lower across the board, but it was bond yields continuing to push higher that were the talk of the street. TLT dropped more than 2.5% on the day as sellers of bond hit the market hard. Perhaps it’s a view of future inflation, but the move in bonds certainly appeared to cause the stock market to gyrate in wild fashion. Buyers at the end of the day were able to take the sting out of the wild day. Lower volume across the board was a welcome sign avoiding a stalling day. Not a typical consolidation day, but this market is anything but normal.

The close was very important as it did save us from significant damage. Interestingly enough the McClellan Oscillator, a measure of overbought/oversold conditions turned lower near oversold. Given the most recent move off last week’s lows not in overbought territory certainly helps the case to continue higher.

One hiccup to the rally may be what happens with bond yields. Since 2009 money has poured into bond funds and the trend continues. However, if bond yields continue to rise the situation will become very dire for bond funds. Higher yields means lower prices for bonds crushing the NAV of bond funds. It may take some time, but holders of bond funds will not be happy when they see significant losses in their portfolio. Even short duration portfolios will see damage, where will investors seek shelter? Will equity funds come back in favor? Anything is possible, but it is highly likely flows will favor equity funds in the future.

Despite the intraday action we remain in a full buy signal and appreciate the “pause.” Now, over the next few days we’ll need to find further power like we say during Tuesday’s market. Always cut your losses short!

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