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Tuesday, January 29, 2013

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

 We are seeing a liquidation of bonds in favor of stocks

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.

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.

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