Market Direction and Stock Trends

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Sentiment Speaks: Bonds Are Killing The Stock Market
By: Avi Gilburt | March 3, 2021

Yes, it is time for me to post another article, which means it is time for another dose of reality about the market.

All I have heard for so many years is that if the market is going down, you should "hide in bonds," as they are a good safe haven when the market declines. Yet, has anyone even looked at the multi-decade bond trend which has been upward bound alongside the financial market uptrend?

So, of course, with the market dropping over the last several weeks, it must certainly mean that the market is rallying higher. Right? Yet, as bonds have dropped these past few weeks, everyone is panicking and claiming that the market is going down because interest rates are rising.

Which is it folks, as you cannot have it both ways!? Does the stock market rally with bonds? Does the stock market rally when bonds are dropping? Does the market drop alongside bonds?

In truth, most people just fit the narrative to what is going on at the time in the markets. In other words, it’s all noise and meaningless.

So, if you still don't believe me, let me ask you this: are markets not able to rally when rates rise? If you actually knew your market history, you would know that markets have risen during times when rates rise and have also risen during times when rates fall. So, history tells us that the directions of rates is meaningless with regard to the trend of the stock market.

As if the confusion regarding bonds and the stock market is not enough, I also heard this past Thursday that the dollar rallied because of rates rising. But, when I look at the daily bond and dollar charts, all I can do is scratch my head and say “huh!?”

Both bonds and the dollar have been in a downtrend since March of 2020. So, when the dollar rallied a few cents this past week, some pundit thought it to be brilliant to ignore that both the dollar and bonds have been dropping together for a year, and claim that the few cents the dollar rallied on Thursday was due to rates rising. Clearly, we have yet another pundit who is simply not burdened by the facts, or who even bothers to pull up a simple chart. But, damn the truth, this narrative sounds so much better.

I have warned many times before about relying upon seeming "correlations," as when they break down, they will leave you quite confused. Historically, markets have risen during periods of rising rates, and they have risen during periods of dropping rates. The direction of interest rates is not determinative of the direction of the stock market. Suggesting anything else is simply false.

If you are being honest with yourself, you would know that bonds had a secondary double top struck in early August, and have been declining ever since. But, what has the stock market done since early August?

At the time the bond market struck its secondary lower high in early August, the SPX was around 3750. And, as the bond market dropped over the last seven months, the stock market rallied from 3750 to 3950SPX. Those are the facts. Trying to force any other narrative about bonds is simply dishonest.

So, the “cause” of the market drop these last two weeks was not due to rising interest rates. Rather, bullish sentiment had gotten too heated, and the market needed a pullback. That is the simple and accurate explanation as to why the market has been pulling back of late.

Regarding the market itself, it is rather simple. As long as the market continues to respect the 3775SPX region, then I am still waiting the break out set up to 4300SPX over the coming weeks. However, if the market is unable to hold the 3775SPX region in the near term, then we may get a bit of a deeper pullback towards the 3600SPX region before we begin that rally to the 4300SPX region. Under either scenario, the 4300SPX region remains my next intermediate target for 2021.

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