Stocks Are Disconnecting From the Bond Pressure
Bonds slid again, but stocks posted solid gains as buyers hunted for some of the worst performers.
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The main market story on Monday was that stocks are becoming less tied to bond market action. The iShares 20+ Year Treasury Bond ETF (TLT) was lower for the eighth session, but equities shook off some early volatility and put together some solid gains before some late selling hit. Â
The Roundhill Magnificent Seven ETF (MAGS) gained 1%, and the iShares Russell 2000 ETF (IWM) added 0.65%. Breadth still wasn’t great at around 49% positive, and new lows still outnumbered new highs by about 350 to 100, but that ratio is improving. Last Thursday, there were almost 500 new lows against just 60 new highs. It was a better day for the broad market than we have seen in a while but breadth still needs further improvement.
Absorbing the Bad News
For weeks, every new low in bonds has meant more pain for stocks, especially the ones outside of AI. On Monday, the market absorbed the poor bond action and kept going. There was increased interest in buying some of the stocks that have been the worst recent performers, which is the kind of rotation we haven’t seen much of lately.
The market has been working hard to adjust to higher interest rates, and one sign that the adjustment is taking hold is when bad bond action stops doing as much damage. One day doesn’t prove it, but it is a step in the right direction. If bonds simply stabilize, that may be a sufficient catalyst for more bounce action in stocks.Â
Getting Ahead of the Calendar
I suspect part of this is traders trying to get ahead of positive seasonality. It is still a bit early, but the statistics for year-end strength are compelling, and traders don’t want to miss a penny of it. When enough people are positioned for the same thing, they can make it happen sooner than the calendar suggests. Seasonality works to some extent because it is self-fulfilling and there seems to be quite a bit of awareness of the stats.
It is important to understand that seasonality is a tendency and not a certainty. When it doesn’t work as expected it can create an ugly trap for overly anticipatory buyers. We have earnings season coming up quickly and that is going to be the main determine of what the market does next. Currently, expectations appear to be low but they may start to run up as we await news from the leaders.
Game Plan
I’m encouraged but the action on Monday, but I’m not changing my approach yet. I’ll keep adding slowly to the names I like and look for follow-through before putting more cash to work. If the worst performers keep attracting buyers while bonds struggle, that would be the change of character I have been waiting for, and I’ll be ready to act on it.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
