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The era of low interest rates is nearing its end, now that the Federal Reserve raised short-term rates this month and promised several more increases in 2017. But this isn’t the only factor moving markets.

Without getting into economic policy, the charts point out several positive developments that should make investors happy in the coming year. However, a good deal of the benefit will go to the stock market, as money flees bonds and as the economy improves further.

The really good news is that current trends have several technical roadblocks ahead to suggest that interest rates are not going to explode higher.
Last month, I argued that inflation was still subdued. A good deal of that argument was due to the performance of commodities, yet some was based on the performance of the Treasury market, and that is where I will focus now.

After a brutal second half of the year, bondholders and high-dividend-paying stockholders may be in for a little reprieve. In other words, bond prices may be in for a bounce as interest rates back down a little bit. That’s just the normal ebb and flow we see in any market.

No doubt, a near-doubling of the benchmark 10-year Treasury rate in just a few months is a sharp move. For example, the popular iShares 20+ Year Treasury Bond exchange-traded fund (ticker: TLT), which tracks slightly longer maturities, fell sharply since the election as interest rates rose, but now sits on a rather strong support floor (see Chart 1).

Chart 1

Not only is it close to the level at which the last major decline ended in 2015, but it is sitting right on the rising trendline from the early 2011 low. Momentum indicators tell us that the ETF is oversold in the weekly time frame. But even more interesting is what the indicators are telling us in the daily, or nearer-term, time frame.

While prices continued to fall in December, indicators started to rise. That suggested that the decline was losing its power as bears reigned in their aggressive selling. Typically, the divergence between price action and indicators is a warning sign that the price trend is about to change. It is similar to a ball thrown up in the air. While it moves higher, gravity is tugging on it to slow down its speed, eventually changing the ball’s direction.

The bigger question is whether this bounce will end--and what happens afterward. For that we move to the long-term chart of the 10-year rate itself.

While rates were in decline since the 1980s, the trendline I like to use originates in 1994, when a sharp rally ended. I pointed to a similar line for the 30-year maturity in a different column last month.

Right now, this line is just above the 3.0% level for the 10-year rate (see Chart 2). It is also near an important chart resistance level that halted the market in 2013, as well as the low seen in 2003.

Chart 2

These two features reinforce each other to form a yield ceiling with a general target time frame of late 2017.

The technicals suggest rates will stall there, at least temporarily, and by that time the market will know more about how the new economic policies are doing.

Interestingly, should rates try to move through that level in a more accelerated pace, it would suggest the economy has started to overheat and the Fed would likely step in to halt it.

There is another important development to note. The yield curve has gotten steeper, and that suggests the economy is heading in the right direction.

The yield curve is the array of interest rates in the U.S. Treasury market from short three-month bills to long 30-year bonds. When it is steep, long rates are greater than short rates, allowing banks to profitably lend money as they borrow short and lend long. When the curve is flat or inverted, with short rates greater than long rates, it often signals economic problems.

To simplify, we can use the spread between the 10-year yield and the two-year yield. Last month, I pointed out that the spread increased to a critical crossroads. If the spread stalled at this resistance level, it would have likely resumed its decline. However, if it broke through to the upside, it would signal that the decline was over--and that is what has occurred.

In other words, the journey toward a recession-signaling yield curve was halted, and a recovery seems to be at hand (see Chart 3).

Chart 3

As with the bond market itself, the current short-term trend shows signs that it is about to stall or even back down a bit. However, in my view, the three-year narrowing of the spread changed into a new trend of an expanding spread.

The bottom line is that interest-rate levels are on an upswing, but there is no evidence yet on the charts that it will be a runaway type of move. And the form of the increase seems to be improving as the yield curve steepens.

The advantage has shifted from bonds to stocks. And while a bounce seems likely in bonds, and the overheated stock market rally seems likely to pull back a bit, I think the implications for the coming year are clear: Stocks are the place to be.