The bear case rests on two major Federal Reserve policies: [i] the [gradual] withdrawal of QE and [ii] the continuance of ZIRP. If either one is reversed, the stock market reverses.

There is however the interest rate curve to consider, other than the short end which is controlled by the Federal Reserve.


The 10yr has bottomed. It has also started what looks like a new trend higher. This is in large part because the Fed switched its QE purchases away from the 10yr and back to MBS securities [to hold mortgages lower] and the banks’ balance sheets.

In the short term, a very indefinite period of time, I don’t believe that a rising interest rate effects stocks in a negative manner. After all buying against the trend of rising yields, costs you money. Also currently the real return is far lower, thus stocks, which appreciate nominally, continue to benefit.

At some point though this changes. At some point the relative risk of the so called risk-free return outweighs the nominal [or real] returns on holding stocks. At that point, we see a rotation out of stocks back into Treasuries. Will that point be reached in 2014? I don’t think so, but, watch it nonetheless.

Margin Debt.

Margin debt suddenly started to be discussed again within the last two weeks. Margin creates leverage. High leverage that remains unhedged, creates higher volatility. Higher volatility creates a higher perceived risk. Both of these combine into shortening the ability to hold investments, and magnify losses to the position. That margin debt is again at or near all-time highs argues for an increase in volatility. Data here



dumb money

Sentiment is also driven via the media. Whether that be the traditional media or the newer blogoland. All forms of sentiment tend to conform to the current trend. When at extremes, also tend to be wrong.