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Believe It or Not, Stocks Are the ‘Cheap’ Asset

We are seeing a liquidation of bonds in favor of stocks


Stocks took a breather Monday following the longest winning streak since 2007. There was weakness in materials stocks, and a lower-than-expected December pending home sales report showed a month-over-month decline of 4.3%. But December durable goods orders rose by 4.6% versus an expectation of no change.

At Monday’s close, the Dow Jones Industrial Average was off 14 points to 13,882, the S&P 500 fell 3 points to 1,500, and the Nasdaq rose 5 points to 3,154. The NYSE traded 656 million shares and the Nasdaq crossed 396 million. Decliners were ahead of advancers on the Big Board by 1.4-to-1, but on the Nasdaq advancers led by 1.3-to-1.

VIX Chart
Click to Enlarge

On Monday, the CBOE Volatility Index (VIX) popped from its lowest point in memory on a gap. But is this significant or just a reactive bounce following the recent lows? I think the latter. However, the index may be telling us that a near-term correction is about to occur — not big news since every pundit is parroting the same theme.

Bond Chart
Click to EnlargeTrade of the Day Chart Key


Far more significant than the temporary jump in the VIX is the liquidation of bonds in favor of stocks. The chart of yields on the 10-year Treasury bond shows a bullish cross of the 50-day moving average through the 200-day moving average, a buy signal from the MACD, and an intraday yield of over 2% for the first time since April of last year.

Conclusion: The jump in the yield of the 10-year U.S. Treasury bond is very significant because it means that bonds are being sold in huge quantities (remember, bond yields up equals bond prices down). The money from bond sales is going into the stock market. Why? Because, believe it or not, at 13.6 times S&P earnings, it is a “cheap asset” even after the big January advance in stocks. 

After a slight correction in small-cap and midcap stocks, the chances are strong that the stock market will continue to move higher.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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