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It’s not really a gangbusters day in the stock market. The S&P is up a paltry bit, at last glance. But it’s up, and after the ugly jobless claims numbers early, that should be a red flag to stock investors that there’s a decidedly Pollyanna-ish element to recent trading. Another signal is the CBOE Volatility index, or VIX, the much ballyhooed market “fear gauge,” which is flirting with falling below 15 in intraday trading.
But for my money, the thing I’m watching is the bond market. The yield on the 10-year has been moving pretty steadily lower since it crested at a bit more than 3.70% back in February. And despite all the inflationista frothing, fiscal debt debates, Bill Gross dismissals and S&P outlook warnings, investors have kept buying Uncle Sam’s IOUs.
Check out this chart, which shows the S&P 500-stock index (the blue line) move higher in recent weeks as the 10-year yield (red line) moves lower. (Remember yields move in the opposite direction as prices, so a lower yield means investors are pushing the price of bonds higher.) That means investors in the bond and stock markets are seeing the world in decidedly different ways. In other words, somebody’s wrong.
It doesn’t get as much attention as the stock market, but in the investment world the bond market is often thought to be the dog wagging the tail that is the stock market. If so, you might want to take a bit of profit off the table.
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Excellent question. A big unknown for the bond market is how much higher the yield on the 10 year would be if the Fed wasn’t buying U.S. debt. The answer is … we don’t know. But it’s interesting to know that since the QE2 program really kicked in yields have been rising. (The whole idea is that they would go lower.) So, I find it a little tough to believe that the QE2 bond buying program is the sole reason for yields to move lower now. I think it’s more likely that the bond market is benefiting from slightly soft looking economic data lately. But again, nobody knows for sure.
How much of that IOU buying is allocable to the QE’s?
“That means investors in the bond and stock markets are seeing the world in decidedly different ways.” How does it mean that? Doesn’t it show that investors are buying both stocks and government bonds now? You don’t have to have a different view on the world to invest in one or the other, necessarily.
@Deej:
Thanks. And thanks for the heads up on small caps. They’ve been roaring lately, up more than 5% in the last month, vs. more than 3% for the SPX.
Very Good article. Thank you. To the point and very clear chart. I see top in RUT and eur/usd: http://bit.ly/imctqE
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