The bond market is a great indicator for equities. Often times what takes place in bonds typically precedes the action in stocks and is a way we can confirm price action. We saw an example of this in March when the 10-year Treasury yield was making a lower high while the S&P 500 was making a higher high. Although back after Opp Twist was announced in late 2011, bond yields also diverged from price but the equity market was able to hold its ground, keeping the advancing going for a few more months.
During this drop in equities of a little over 6%, we have not seen bond yields correct by the same magnitude. Actually, the yield on the 10-year Treasury has been relatively flat, if not up.
Bond traders are considered the ‘smart money’ and if they aren’t convinced of the recent weakness in equities, then I’m not sure how much more pain bulls will have to sustain. Equity bears will need to convince the bond market that it’s time to start bidding up Treasury’s for them to stay in the driver seat and keep stocks in a down trend.
This isn’t enough for me to shift my view on stocks but it does make me hesitant to call for continued weakness when bond yields are diverging. So while we get a small pop in stocks today, keep an eye on Treasury’s to get a feel for where things might be headed.
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