There has been a lot of discussion the last two days about a massive rotation out of small caps and into a narrow group of big caps that tend to drive the DJIA. There is a second rotation that is taking place as well and this one is exciting the bears.
The second rotation is a move out of bonds. The 20+ Year Treasury Bond Fund (TLT) broke key support and is hitting levels last seen in July 2015. With a few more downticks the TLT will be back to 2014 levels. The 7-10 Year Treasury Bond (IEF) is also under pressure but is still holding recent lows.
With the 20+ year bond lagging the 7-10 year bond, the yield cure is steepening. Longer term rates are going up faster than shorter term rates and that is good for banks and other lenders that borrow short term and lend long term. The Financial Select Sector SPDR ETF (XLF) has jumped over 1% on this and banks like Bank of America (BAC) and JP Morgan (JPM) are bouncing after breaking down the past couple weeks.
The challenge of this sort of action is that individual stock picking is at a disadvantage. If you are in the wrong sector then it doesn't much matter what stock you might own. That may create some opportunities longer term but it can be painful in the shorter term when the stock you favored for technical or fundamental reasons is mistreated.
The bears have long believed that higher interest rates would be what finally kills this bull market. They have been wrong for many years about rates and the market but the rotational action that is occurring now demands that we increase our vigilance.