It should be no surprise to investors that stocks have been struggling since the short term parabolic rise completed back in late January. The subsequent 12% correction followed by extremely choppy, sideways action is not at all unexpected and is unfortunately far from being complete. Besides this being “normal” action after a double digit decline and an “easy-peasy” 2017 market, investors should look no further for additional explanation than what is happening in the bond market.
As you can see in the above chart of the 10-year treasury yield, it finally tagged the psychologically important 3% handle yesterday (although it actually closed a whisker below), a full 50 months since its last visit. Round numbers, whether they happen in stock indexes, bond yields or other investments are important as they act as magnets for potential future moves. The fact we hit that level yesterday is not a surprise as the setup unfolded in late January (I blogged about this possibility here). Breaking out of it box and moving higher could be a real impediment for the advancement of stocks. Stock investors need to keep a close eye on the bond market right here because as rates rise, eventually yields become attractive enough that stock owners throw in the towel shunning the wild volatility involved with owning stocks and instead opting for a more steady, fixed return that bonds have historically provided. As more and more investors switch out of stocks and into bonds, stock prices tend to fall as sellers eventually outnumber buyers.