As this rally off of the March low has unfolded, one thing that has become apparent is the fact that simple momentum/volume analysis has not been an effective tool to analyze the magnitude of the move.  Light volume days on tepid momentum became the hallmark of this rally as an overabundance of liquidity was looking for a home.  The 'buy the dips' crowd has dominated the market for the last seven months while the 'buy and hope' crowd says that the worst is over, even as foreclosures continue to climb, credit card defaults reach record levels, and job losses mount.  Anyone who has repeatedly tried to short this market based on simple volume and momentum indicators over this time frame is either out of tradable cash or out of a job.  This type of market behavior proves that a multi dimensional look at the markets is best.  One of the best methods to employ is the study of inter-market money flows.  

In the chart below I have plotted the S&P 500 (the solid black line) along with the ten year treasury yield index (the red dashed line).  The chart shows the intermarket relationship between equities and interest rates (the inverse of bond prices) as money flows from one market to the other.  These two lines should move in synch as exits from one market find their way into the other.  For example, as funds flow from bonds to equities, that produces higher equity prices and higher interest rates, while fund flows from equities into bonds produces lower equity prices and lower interest rates.  When this relationship diverges, it is a clue that the equities may be ready to change direction.  Notice how as equities topped in 2007, the S&P 500 pushed out to one final high while the ten year treasury yield index made a lower high.  That showed that investors were taking money off the table in equities and moving toward the safety of government debt. 

Now take a look at December 2008.  Interest rates began moving higher even as equities plunged from their January high to their March low.  That showed that money was positioning itself to take on more risk as money flowed out of treasuries, thus pushing interest rates higher. 

If we look at the current situation in this intermarket relationship, it shows that while equities have continued to power higher, interest rates topped out in June.  This shows that funds are flowing into bonds as well as equities,  Yes the treasury has been issuing mountains of new debt, and the fed has been monetizing it, but that didn't seem to affect the equity/interest rate relationship from March through June.  Interest rates topped just at the onset of the June correction, and they have not since made new highs along with equities.  That begs the next question: If this is a new bull market, why aren't more funds flowing into equities over bonds?   Investors certainly aren't buying ten year notes for the yield.  The only logical conclusion is safety. 



While this shows that all may not be well with this rally, the fact of the matter remains that the trend is up.  Keep your stops in place on your long positions for now and do not short until price support levels are broken on accelerating volume.