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Stocks and bonds moving together Stocks opened higher yesterday after the emotional news of the death of Osama bin Laden.  These emotion driven market moves tend to reverse quickly (at least in the short-term) so the fact the the Dow closed down 3-points on the day, shouldn't be too much of a surprise - particularly in an overbought market.                                     For the TSP, the C-fund slipped 0.17% yesterday, the S-fund fell 0.70%, the I-fund gained 0.72% and the F-fund (bonds) added 0.05%.  The S&P 500 closed just a couple of points below the highs, but the negative outside day could trigger a short-term pullback, but in this very bullish market environment, it is tough to get too bearish. If you recall, we have posted this illustration of one of the two more common outcomes of an inverted head and shoulders pattern.                                        Typically, we see a breakout above the neckline after the H&S pattern is completed.  Many times after the initial breakout, we see a modest pullback that tests the neckline as the market usually needs a little little rest after rallying off the bottom of the right shoulder up to the peak of the breakout.  You would want to see the neckline hold in this case, and then see the rally resume.  This would be a healthy move and would help the bullish market catch its breath.                                                   Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk In this chart there is still a big open gap near 1315 that is a concern as gaps can act like magnets if not filled. The other common outcome of an inverted head and shoulders pattern is seeing a pullback before the breakout, and that pullbacks comes down to test the middle area of the head of the H&S.                                        I have mentioned this a few times over the last couple of weeks but I don' think I showed a good example.  I noticed that the chart of the yield on the 10-year T-note is also in an inverted head and shoulders pattern, but instead of breaking out, the yield has pulled back and is now testing the area near the middle of the head.                                                    Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk It is also testing the 200-day EMA so that's some pretty good support. - A quick reminder that bond yields move in the opposite direction of bond prices (F-fund) so this drop in rates from the neckline has been bullish for the F-fund. The other day I mentioned that it is a little unusual to see bond prices (F-fund) and stock prices moving in the same direction.  It is usually stock prices and bond yields that move in unison.  It is not unheard to see the F-fund and stocks funds move together but we got used to see the F-fund go up when the stock funds were down, and visa versa.  That was the case up until we saw both the yields and and the stock indices hit the resistance of their prospective necklines on the chart.  That's when they headed in opposite directions as stocks broke out, and yields pulled back. I'm talking in generalities here to make a point and a possible prediction:  Why would yields go down?  For one, a falling dollar will pull yields down.  A weak dollar also helps the prices of commodities and basically the price of anything that is traded in dollars, including stocks and bonds. Remember bond prices move inversely to yields.  So if bond yields rebound off of the 200-day EMA and the test of the middle of the head of the inverted H&S, we will likely see bond prices fall.  What would cause that?  A rebound in the U.S. dollar.  If that happens we could see some profit taking in the stocks that were rewarded by the weak dollar because of the hike in commodity prices.  That would mean some kind of pullback in both  stocks and bonds.   We'll have to see how that plays out.  I hope that wasn't too confusing. Thanks for reading!  We'll see you back here tomorrow.   Click here to discuss today's Market Commentary Tom Crowley

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