Rising Bond Yields Create Uncertainty

Time to break out the TUMS? Bonds are causing indigestion for investors as yields in Japan hit a new high and the US Treasury bond yields continue to push higher as well. The Fed talks ‘tappering’ and bond investors talk rising interest rates. The push higher in bond yields is expected as the stimulus slows or is cut, but the fear of rates rising even faster has put renewed fear in stocks. This is what we discussed last week in my notes as the thirty year bond yield moved above 3%. Too much, too fast unsettles investors as clarity becomes an issue. With the stimulus being essentially cut off in Japan on Tuesday, the world equity markets reacted. There is lies the challenge looking forward, reactions to action or inaction being taken by the central banks.

Over the last two weeks sentiment indicators have shifted, bulls fell from 54.2% to 45.8% and the bears climbed from 19.8% to 20.8%. The shift to the middle is growing and could be the beginning of a trading range for the broad market indexes. Either way the fight has begun between the buyers and the sellers. That is shown in the volatility index. The tug-o-war, so to speak, is creating uncertainty and that causes indecision on the behalf of investors. Markets like clarity to thrive in an uptrend. Investors like clarity to create confidence in holding stocks. The stimulus reduction is causing some of the grief, interest rates are putting in their two cents worth and then there is the worry that higher interest rates will hurt the housing sector. As you can see once the snowball of worry starts rolling it only picks up momentum.

The 1597 level on the S&P 500 is where the decision will be made short term from my perspective. We tested that level of support last week and bounced. A break below the 1597 level, the uptrend line off the November low and the 50 day moving average would put the index in a negative direction short term. All three points are close to the same key level currently. The microtrend for now is down, the short term trend remains up… which explains the fight between the buyers and the sellers currently. 1620-1660 trading range could be the outcome, but that will depend on how much fear and anxiety is created from bonds, the Fed, etc. etc. etc.

Bottom line, take the defensive measures needed to protect your portfolio. When the uncertainty rises and the fear levels climb, you don’t want to wait to take the step necessary to manage your risk. Remember to remain aware of your strategy for each position in your portfolio. The timeline for asset has to be taken into consideration relative to timeline of what is taking place in the markets. Don’t make irrational decisions based on fear, make decisions that are based on your beliefs and convictions going forward. You will not always be right, but you would rather error to the side of caution than speculation.