Bonds vs Stocks

Was looking at some CNBC videos yesterday, as there is plenty of downtime in this sleepy market.  You rarely get CNBC pundits talking about bonds.  It is a stock focused network, and rightfully so, because talking about bonds is pretty boring.  Stocks are where the action is.  But you had a lot of talk about bonds yesterday.  If you look at the chart of the 10 year yield, you can guess that it was bullish talk about bonds.

The interesting thing about this bond market move over the past few months is that stocks are also rising.  This happens more often than people think, as stocks and bonds are not as tightly correlated as believed.  Just looking at what happened from 1995 to 1998 as the 10 year was downtrending as stocks skyrocketed.  Same thing for the 2009 to 2012 period.

Since CNBC is talking about bonds, one can guess that the up move is over.  Yes, probably in the short term.  But I actually believe that bonds will rise in the intermediate to long term, looking out more than a few months.  It is getting clearer that the bond market overreacted to Trump's election and it was sell first, ask questions later.  The reflation trade has mostly been hype, as inflation hasn't upticked like many expected, and growth has been mediocre.  And this is supposed to be the easy part of the cycle, as inventories are re-stocked, after destocking to lower levels in 2016.

I have said this before, but all else being equal, a strong bond market is a positive for the stock market.  The amount of leverage on corporate balance sheets has been increasing steadily, and anytime they can borrow at lower rates, it is a bonus.  Some may interpret the bond market strength as a sign of future stock market weakness.  That is what I heard from a couple of CNBC guests yesterday.  But its more often the opposite.  In any case, using the bond market to predict the stock market is not very reliable.  But if you had to make a guess, bond market strength is better for stocks than bond market weakness.

The put-call ratios have been quite low the last few days.  That's usually a short term indicator of weakness.  Sure enough, we got a little bit of weakness on Tuesday.  I still don't think its the right time to short just yet, as I'd rather play it conservatively on the short side.  Next week could be a good time after the Fed shows their hand.  There are some events tomorrow, the ECB meeting, UK vote, and Comey hearing.  Usually the market comes away higher after those type of events, not lower.  So expecting a rally tomorrow and Friday.