David Rosenberg of Gluskin Sheff has researched bond yields and their corresponding effect on the stock market. According to an article on CNBC.com, Rosenberg found that if yields fall more than 1.20%, a bear market in stocks is just a couple of months away. He cites the bear markets of 1990, 2000 and 2007 as examples.
He may be right. On Tuesday, the Federal Reserve has indicated renewed quantitative easing. The Fed will reinvest the proceeds from maturing mortgage backed securities, bonds and notes and buy more securities. Buying Treasury securities is the Fed's way of keeping interest rates low. In turn, the Fed hopes low interest rates would spur the economy and avert deflation. The Fed is a bit more than nervous about the economy if it is reverting to stimulus.
The fact that the Dow sold off following the Fed news is not good. The Dow was down 54.50 points to close at 10,644. Usually, days with Fed announcements are good days for the market. But not only stocks decline, commodities also sold off with oil and grain prices down -- all deflationary moves.
No one really knows where the market is headed. Nevertheless, it's wise to pay attention to the bond market and to bond yields. It's also a good idea to follow the money flows. In the recent reporting week, equity funds saw outflows of $688 million, while bond funds increased by $2.1 billion.