SO, a rise in stock prices in spite of rising rates is basically the pattern established since October of last year. in essence, stocks and bonds have de-coupled since July of last year, with a brief period of re-coupling strewn in between July and October this year. i took this return to the 'normal' pattern to be a sign that the market had returned from worrying about deflation to worrying about inflation, and the market reaction to the jobs data actually proves this is the case. last year, as fears of deflation mounted, strong jobs data were interpreted as 'good' for the market. recently we have switched back to hailing less-than-expected strength in the jobs data as 'good' and signs of a continuing tightening of the labor market as 'bad', indicating that inflation is now the foremost concern.
in this context, the latest rally's staying power is almost un-natural, since the behavior of the credit instruments shows the inflation concerns are clearly not from the table.
as various sources looking at liquidity in the market show, it has been a rally driven purely by fund inflows and the Fed's constant provision of liquidity due to Y2K coupled with massive credit creation by banks and non-banks alike. as long as these patterns persist, one would expect pullbacks to be shallow. however, something isn't right.
apparently the bond market couldn't even be pacified by direct Fed intervention today, and that is imo a very bad sign. unless some piece of economic data alleviating recent concerns comes along, the bond could enter into a bout of capitulation selling.
if that happens, stocks will have to adjust downwards.
regards,
hb
EDIT: rates and the market:
decisionpoint.com |
