The positive start to earnings season and sharp improvement of China's December trade surplus has buoyed the market as MoneyShow's Tom Aspray examines how a surging stock market could affect bonds.
Wednesday's gain in the stock market indicates that the market's correction may now be over as the advancing stocks led the decliners by a 2-1 margin. Therefore the Advance/Decline line is leading prices higher, which is a positive sign.
A strong close in the S&P 500 above 1466 should signal a rally to the 1495-1505 area. This would certainly squeeze many on the short side, but I don't think it will convince the long-term pessimists. They are likely to find more signs of economic weakness or political Armageddon to add to their "wall of worry."
If stocks do accelerate to the upside, a more interesting question is what will happen to bonds? While stocks surged to start the New Year the bond market was hit hard as the yield on the 10-year Treasury Note rose from 1.756% to over 1.965% in just three days.
This certainly got the attention of some bond holders but most seem to be quite complacent. In 2012, there was an inflow of $56 billion to bond funds, so the lack of any great concern by bond holders is not surprising. So does the technical evidence suggest any change in the long-term bond bull market, let's take a look.
Chart Analysis: The weekly chart of the T-Bond futures shows that the uptrend from the 2011 lows, line a, has been broken over the past three weeks.
The rebound in the iShares Barclays 20+ Year Treasury Bond Fund (TLT) failed at $127.19 in mid-November as it has dropped below the September lows at $123.92.
NEXT PAGE: Have Bonds Topped Out?