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The issue I have with this tape isn't the technical or even fundamental outlook, but is instead what the level of interest rates means. Quite honestly, I am rather tongue-tied, and therefore need to reflect some more on the proper course of action. My dilemma is this:

If the economy were picking up steam and growth was going to be better-than-expected in the second half - why is the 10-year note yielding 3.28%? Either the economy is much worse than most believe, or there is something structural taking place (hedging or other non-fundamental reason) that may have an undefined longer-term impact, or some combination of the two.

What keeps going through my mind is the risk that has been placed in bonds, whether it is fundamental or non-fundamental, after a bubble burst in stocks. If this is a structurally led rally in bonds, then it must be unwound at some point. People are just again becoming interested in reentering the financial markets and don't need another shock -- for any reason. How that is unwound is what should determine the intermediate-term outlook for stocks. I just need to ask people a lot smarter than me, just how that could happen in an orderly way.

Until I have greater clarity, the confusion is just another reason I am advising my clients to focus on the more defensive areas.

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