Bad Time For Bonds, Good Time For Stocks

 | Aug 20, 2013 12:18AM ET

Yesterday, the tepid market had virtually no new data from corporate earnings or the economy, and slid lower throughout the day, especially near the closing. But the 10-year bond yield hit a two-year high at 2.9% and closed at 2.88%.

The increase in bond rates should have been expected with the Fed minutes due Wednesday. The market hates uncertainty. However, it is very certain that the longer-term rates will go higher. The Fed’s annual conference with economists begins Thursday in Jackson Hole, Wyoming, without Chairman Bernanke’s presence. Very few new “certainties” are likely to come out of the symposium. The bottom line: It is a bad time for bonds but should be a good time for stocks.

You wouldn’t think that was true, given last week’s market during which, despite rising bond rates, all style/caps fell in a very narrow range of -2.07 % to -2.56%. Large cap value was the best of the bad performers, while mid-cap growth was the worst, but with such a small range there is little to learn.

In similar fashion, sectors were all down last week, with Basic Materials falling the least, -0.1%, and the last-place Utility Sector dropping a woeful -3.59%. Rising interest rates are always bad for utilities, which trade much like bonds due to investors’ reliance on their dividends. Today, all sectors were down except Healthcare, which eked out a tiny gain of +0.17%. Energy and Financials were off the most, at around -1.5%.

Other than the Fed minutes scheduled for Wednesday, there is very little economic news expected this week. Initial jobless claims can probably bolster the sliding market regardless of whether the report is good or bad. A lower jobless claims number would be good news for the economy, but a higher number would cause a little less concern about the immediacy of QE3 easing.

The only other economic news of import is Leading Indicators on Thursday, and that index is rarely a surprise since we already know most of its components. (It will probably be better than last month.) New home sales on Friday could reignite interest in home builders, which seem to be faring poorly from rising mortgage rates. In our opinion, valuations among home building stocks are attractive after their recent sharp sell-off.

Sorry to sound like a “broken record” (if anyone remembers what that sounds like), but we continue to favor searching for undervalued growth stocks. They are indeed out there, as you can see from our four stock ideas below. Volatility derivatives such as the iPath S&P 500 VIX Short-Term Futures ETN (VXX) represent attractive hedges, since volatility is still low in this low-volume market.