BOND YIELDS ARE BOUNCING -- SOME MONEY MOVING OUT OF BONDS IS FLOWING BACK INTO STOCKS -- S&P 500 NEARS TOP OF TRADING RANGE -- VIX DOWNTURN GIVES STOCKS A BOOST -- IBM CLEARS 2002 PEAK

RISING YIELDS MAY DRIVE SOME MONEY BACK TO STOCKS ... On Tuesday, I wrote about bond yields being in oversold territory and near chart support at their 2003 lows. I also showed that the 10-Year T-Note price was overbought and up against resistance at its 2003 peak. I suggested that rising commodity prices might start putting some upward pressure on bond yields and downside pressure on bond prices (especially if inflation concerns prompt the Fed to end its easing program). For whatever the reason, bond yields have started to bounce and bond prices are pulling back. Chart 1 shows the 10-Year T-Note Yield rising to a seven-week high. The fact that bond yields are bouncing off their January low also suggests the possible start of a bottoming process. To confirm a bottom, however, the TNX would still have to clear its mid-February peak. Bond prices fall when bond yields rise. Chart 2 shows the price of the 7-10 Year Treasury Bond ETF (IEF) having fallen below its 50-day moving average and a four-month support line. And it's done so on rising volume. Some of that bond money is no doubt flowing back into stocks (especially those tied to commodities). If recent history is any guide, bond selling should benefit stocks at least over the short-run.

Chart 1

Chart 2

BOND AND STOCK PRICES TREND IN OPPOSITE DIRECTIONS... Since 2000, bond and stock prices have trended in opposite directions. Chart 3 shows that to be the case. During the bear market in stocks from 2000 to 2002, bond prices rose. Bond prices peaked in the spring of 2003 when stocks bottomed. Bond prices then fell as stocks rose. In the middle of 2007, a sharp upturn in bonds coincided with a stock selloff. Chart 4 shows their inverse relationship over the last year more clearly. Bonds started rallying last July when the market started selling off. They jumped again during October as the market started rolling over for a second time. During March, a pullback in bond prices coincided with a bounce in stocks. So far, both counter-trend moves are relatively minor in nature. It's important, however, to understand the short-term dynamics between the two markets. Whatever hurts one usually benefits the other.

Chart 3

Chart 4

S&P 500 STILL IN TRADING RANGE... Yesterday's market bounce helped push the S&P 500 toward the upper end of its three-month trading range. The S&P price, however, remains below its February peak and its 100-day moving average (blue line). The market would have to clear both chart barriers to turn its intermediate trend from sideways to up. Even if that were to happen, there's a lot more overhead resistance in the vicinity of the 200- and 400-day moving averages.

Chart 5

FINANCIALS SHOW SOME BOUNCE ... Financial stocks are finally showing some resiliency. Chart 6 shows this week's bounce in the Financials SPDR (XLF) forming a short-term pattern of "higher lows" from its March low (see up arrow). That may explain why bond yields are bouncing since there's a close correlation between bond yields and financial stocks. Any bounce in financial stocks eases fears about the market and causes bond selling (and stock buying). So far, however, the financial bounce is relatively minor and well within the confines of a major downtrend. The XLF would have to close above its March high near 27 to turn its short-term trend higher. Even if that were to occur, there's a lot more serious resistance near the 30 level which is where the January high and the 200-day moving average are located. Any kind of a financial bounce, however, would probably give the market a short-term boost.

Chart 6

VIX FALLS BELOW FEBRUARY LOW... Another sign of short-term market improvement comes from a falling CBOE Volatility (VIX Index. The VIX had been in an uptrend since last summer. Chart 7, however, shows the VIX having fallen below its 200-day moving average and its February low. Since the VIX usually trends in the opposite direction of stock prices, this week's downturn is giving a short-term boost to stocks.

Chart 7

IBM CLEARS 2002 HIGH ... IBM has been one of the stocks leading this week's market rebound. The monthly bars in Chart 8 show Big Blue clearing its early 2002 peak at 120 and moving up to challenge its all-time high near 130. IBM leadership is relatively new. Its relative strength ratio (above chart) just turned up a year ago (see arrow). A rising stock price and a rising relative strength line are a bullish combination.

Chart 8