Bonds responded yesterday as expected, bouncing off of a floor of support. Further, stocks lost steam after hitting a ceiling of resistance. This morning, however, stocks are climbing higher and are once more attempting to make a breakout above their 100 day moving average. This is the last significant moving average holding stocks back from making stronger gains. A longer term look at the charts shows other potential ceilings that could cause the stock market rally to stumble. But with the short term upward trading channel firmly in tact, it seems stocks could have the strength to break higher. This could put bonds under enough pressure to cause them to fall to the next floor of support, which is roughly 40 basis points beneath current levels. I see stocks possible stumbling when they hit the longer term downward trend ceiling. Which means I believe the losses in the bond market will be limited. But as always, anything can happen.
According to Morgan Stanley, the U.S. stock market may be at the end of its upward cycle. According to the report, “markets are closer to the end of the day than the beginning.” This falls in line with what I have talked about in recent weeks. With the tax plan and current fiscal stimulus already priced into the markets, the longer term logical move would be for the stock markets to soften. P/E ratios have hit levels that are nearing the same true rate of return as mid-term bonds are currently offering. This means that investors can achieve the same true return in the bond market as the S&P overall is earning based on the price of the their stocks. This is generally an indication of a near term reversal which would help the bond market and hurt the stock market. History shows that it isn’t a matter of if, it’s a matter of when. With the current bill market now at a record time line, the markets are over due for a shift.
Because the trading channel is tight, there is very little benefit of floating. Things will likely get worse before improving. We will maintain our locking bias