Credit Market Choke Hold

Soaring bond yields put an inescapable choke hold on stock prices Monday. The damage to equities was actually pretty light -- and probably temporary -- but more on that in a minute.

If you think folks on the ^IXIC board don't get along, try visualizing a message board between the Fed and the bond market. Since the Fed paused in June, there's been an unusually nasty feud between these two. When central bankers stop hiking, they're supposed to start cutting, and Bernanke hasn't done this. Making matters worse, there's been an unexpected plot twist.

Bond traders are famous as the best and the brightest, and open markets are incredibly efficient. Together, these two have historically run circles around policy-makers. But not this time. Since pausing in June, the Fed has outplayed the bond market -- hand after bitter hand -- and it happened again on Friday with the jobs report.

Monday's action was really about bonds, so tonight I'm starting with a bond chart. Instead of looking at the 10-year Treasury Yield, the frustration bond investors felt today is best understood looking at the chart below. It's the 10-year Treasury Bond, and it took a big fat dump today. In just two sessions, the 10-year has taken out both its 50- and 200-day. Ouch.

The Fed isn't lowering rates any time soon, but bond investors have stubbornly refused to get on board with this. Which brings up the real problem with the chart below: it needs to fall another 11% to be in sync with the Fed. In Bond World, that's a LOT. Probably because of epic inflows of "dumb" foreign money, bonds have gotten ahead of themselves.






For stocks, the silver lining to "no rate cut" is a decent economy. The Composite took a technical dent today as gave up its opening gap on higher volume. But market internals show a bullish bias remains in place. Even though Decliners edged Advancers, Up Volume outpaced Down Volume on both exchanges, and New Highs crushed New Lows, 463-84.

Adding to the bullish tone, the IBD100 moved up 0.2% as 51 of 100 stocks posted gains. Even more remarkable, a stunning 26 stocks hit record highs today. On the downside, three IBD100 stocks were shredded today on heavy volume.







Oil stocks held up very well today while crude prices tumbled. This divergence is bullish for energy stocks.








As Utilities hit yet another new all-time high despite Monday's higher yields, the Transports responded to lower oil and shot up on strong volume. For fans of Dow Theory, the Utilities, Transports and the INDU are all within 3.3% of all-time highs. The green line on the chart below is the old all-time high.









Finally, even though stocks moved higher last week, the AAII Bull Ratio fell significantly. This is contrarian bullish of course, and is good news for stocks.










Despite more weirdness from Iran and higher yields, stocks continue to hold up. Considering the upcoming earnings season, it will be interesting to see if the lack of selling is liquidity-driven foolishness, or if the market knows something about Q1 earnings.

Have a great evening, and it's nice to be home.

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