A possible economic slowdown in China resulted in a lower opening yesterday, but the early losses were partially overcome before the final bell. Companies that trade directly with China, like those in the farm-equipment industry and steel, fell sharply. But the technology and banking sectors gained, again blunting the impact of the selling.

At the close, the Dow Jones Industrials were off 69 points to 13,170, the S&P 500 fell 4 points to 1,406, and the Nasdaq lost 4 to close at 3,074. The NYSE traded 710 million shares, and Nasdaq crossed 394 million. Decliners outnumbered advancers on both exchanges by over 2-to-1.

Yesterday was the first in the last four days that the S&P 500 had a loss and only the second in the last eight to end at a minus. With the index up over 11.6% since Jan. 1, one money manager said to his partner: “Well, we’ve sure had a good year so far this quarter.”

But the quarter will end soon, and most analysts are expecting lower earnings. They might be correct because many companies are lowering their expectations with more conservative “pre-earnings estimates.” S&P expects the first quarter to have produced an earnings gain of just 0.5%. Analysts cite slow growth in the U.S. and Europe as the reason for a lack of optimism.

Should the pessimism have an impact on stocks? No. Earnings for the first and second quarters of this year were reflected in stock prices last summer and fall. This is the “discounting effect” of the market. In other words, the stock market’s current level is based on earnings expectations six to nine months in the future. And Q3 and Q4 are expected to be strong.

So, we go back to technical analysis to help us with the future direction of a stock market that’s reaching its highest levels in four years. The recent breakout confirms my position that we’re in a bull market that should last for the remainder of the year. Thus far volatility has been very low as prices plod higher — a stark contrast to the wild ride in the second half of last year.

Why the difference? The answer is the “Discounting Effect” of stocks. It’s clear now that the recession is behind us — virtually every economic indicator is moving forward.

Much of the move forward in stocks was and is the product of bond sellers driving stocks higher and bonds lower. RiverFront Investment Group cites the fact that “After 19 weeks of ranging between 1.8% and 2.1%, the 10-year yield rose to 2.3%, the first time it has been above its 200-day moving average since July 2011.”

For the last several days, we’ve been concentrating on where to find value. Obviously, one place that has little value is the bond market because bond prices continue to fall. This brings me to one of the oldest tried-and-true market sayings: “Money will always flow to where it gets its best return.”

Money has been flowing from bonds and into stocks because many blue chips are paying a higher dividend rate than their own bonds, plus they offer the possibility of growth. Stocks are still the best place for investment capital to grow.

Click to EnlargeThe rise in bond rates, however, presents investors who are willing to accept the risk that the trend will continue with an opportunity for huge gains from ETFs that increase in price as bonds fall. Last Thursday, I highlighted the ProShares UltraShort 20+ Year US Treasury ETF (NYSE:TBT). This is a speculative “contra” type of fund that only moves higher if bond prices fall, and it could be an ideal hedge against rising rates while producing an outstanding return.

There are other contra ETFs with various investment characteristics. Read their prospectus and be sure that you understand the basis of their price movement and fees before investing.

Tomorrow, I’ll continue the search for undervalued investments in a strong stock market.