Recently both stocks and bonds have been moving in same direction which is atypical, since bonds are seen as defensive asset, while stocks are viewed as risk-on, and generally move in opposite directions. So recent movement has been confusing to some, but make perfect sense to others.

Inter-Market Technical Analyst John Murphy has offered his view of recent action in both equity and bond relationship in his latest Market Message. Below is an excerpt from that message:

FALLING TREASURY YIELD MAY HAVE MORE TO DO WITH FOREIGN TRENDS… Analysts have been trying to figure out why Treasury yields keep falling, especially this week’s drop to the lowest level in nearly a year. Normally, falling Treasury yields imply a weaker U.S. economy combined with low inflation levels. It’s quite possible, however, that the drop in Treasury yields might have more to do with foreign trends than those in the U.S. While it’s true that the Fed has begun tapering its bond purchases, the Europeans may be about to start an easing process (which might eventually include bond buying). [The Japanese are still in the midst of an aggressive quantitative easing program as well]. In other words, the drop in sovereign bond yields is global in scope — and the biggest drivers in that drop are foreign markets. U.S. bond yields are still among the highest in the developed world. Yields in most developed markets are at or near record lows. Germany’s 10 year bund yield has fallen to 1.36%, compared with 2.45% in the U.S. [Bond yields in Europe’s peripheral markets, which surged during the last Euro crisis, are now at all-time lows]. The fact that Treasury yields are higher than in many other countries actually adds to the appeal of U.S. bonds. Any action that the ECB takes to combat deflation should serve to push Euro bond yields even lower which would, in turn, have a depressing impact on Treasury yields. Lower bond yields around the world are forcing investors into higher-yielding and riskier assets like stocks. Easing moves in Europe should boost European stocks. Falling global rates also favor higher-yielding emerging markets.

Bonds and stocks compete for investor funds. When investors are pessimistic, they favor bonds. When they’re optimistic, they favor stocks. The best way to monitor which market is winning is with ratio analysis. And right now, that analysis favors stocks.

To more or subscribe at John Murphy’s Market Message

The BIG EVENT for this week will be Thursday’s ECB Meeting with most analysts expecting increased bonds purchases to fend off increasing deflationary pressures. This may keep a continued lid on volatility (or lack of) until Mr. Market has more clarity on the issue.

Recent price trends have been bullish so our trade strategy to buy pullbacks to key reference zones continues to keep us in alignment with dominant market forces. There is no change is this current strategy until there is a structural price shift.

Let’s get to today’s numbers:

Prior Day’s High (PDH) is 1922.25…IF this level is penetrated and converted THEN upside price targets 1925.75 initially with measured zones between 1928 – 1931. Failure to hold above PDH suggests a pullback into recent range for some price consolidation. Key support zones are 1916 – 1918, followed by Three-Day CPZ 1913 – 14. Break below the 3D CPZ calls for deeper pullback back into prior key acceptance zone 1906 – 1908.

Stay Focused on the Trading Process…Not the Outcome

Good Trading…David

Habitude Four
I am at ease with controlled risk. I will risk and I will win. I am courageous. I will take a chance. I manage risk to my comfort level. Risk keeps me on my toes, keeps me alert and at the top of my game