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Why higher interest rates are a good sign for the markets

Talking Numbers

Stocks and bond yields did something technically important in the past few days: both tested their 200-day moving averages and bounced back.

That could give an idea of where they're headed next, according to Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson.

"We've reached some critical inflection points after an extremely volatile January," says Ross. "And 'volatile' is putting it mildly."

Over the past several months, yields on the benchmark US Treasury 10-year bond have traded more or less in a range between 2.5% and 3.0%, notes Ross. During that time, when stocks would rally, bond yields would rise (meaning bond prices would fall since bond yields and bond prices move in opposite directions).

(Read: Long yields highest in 2 weeks, boosted by Yellen)

"[Investors were] putting that money into stocks," says Ross. "Exactly the opposite happen[ed] in January; investors [bought] bonds push[ing] yields lower and they were selling stocks."

January's rally in bonds meant yields dropped down far enough to test their 200-day moving average by February 3. On that date, the 10-year yield was at 2.58% while its 200-day moving average was at 2.56%. Since then, bonds have fallen in price and the 10-year yield has risen above 2.7%.

"That's telling you once again investors selling bonds and putting that money into stocks," says Ross.
On the very same day bond yields tested their 200-day moving average, the popular market benchmark Dow Jones Industrial Average dipped nearly 100 points below its own 200-day, where it remained for two days. On those days, the 200-day moving average for the Dow was in the 15,400 range. The Dow has since rallied and closed Tuesday just shy of 16,000.

"This is a big reversal in risk," says Ross. "I think we push out to a fresh marginal new high in the Dow within the first-quarter, potentially early in the second-quarter."

Given the Down's record close of 16,588, Ross' target is only 600 points – less than 4% – away. 
John Stephenson, portfolio manager at First Asset Investment Management, also believes the fundamentals back up Ross' technical bullishness.

(Watch: Stocks rally on Yellen; best four days for S&P 500 in more than a year)

"We've had enough worries about these wimpy emerging markets," says Toronto-based Stephenson. "It's time to start concentrating on what's going right which is America and it's going great."
The key to stock price growth this year, according to Stephenson, is earnings growth in the underlying companies.

"We're going to push 8.8% growth in earnings over the course of 2014," says Stephenson. "That's fantastic."

Stephenson dismisses the idea that the market is in a bubble. His rationale is where stocks highly sensitive to the market – high beta stocks – are currently trading.

"To truly be in a bubble territory, you have to have the high beta stocks trading at a premium," says Stephenson. "Low beta stocks are trading at a premium [while] high beta stocks are undervalued almost at historic lows. But, we're nowhere close to hitting market highs. This market goes higher."

To see the full discussion on interest rates and the Dow with Ross on the technicals and Stephenson on the fundamentals, watch the video above.

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