Signs first appeared last week when U.S. manufacturing data stopped the post-Powell stock rally in its tracks after showing a contraction in activity for the first time since the COVID crisis began. That was a huge violation of the reliable “Bad-Is-Good” trading truism of the past year, and only the second time in three years that the dollar dropped more than one percent and stocks didn’t rally. The other instance marked the literal bottom before the summer bear-market rally, interestingly enough. The next five days after that event were explosive for stocks. 

Not so much today. Despite suppressed bond yields and a flat dollar since last Thursday, our more than month-long rally in stocks is buckling, now struggling to process better-than-expected data in the form of services and employment figures. So, last week, bad data was bad. And this week, good data was bad. How do bulls win? It actually makes sense, if the good services data is cementing inflationary wage gains while the bad data represents peaking capital investment. 

 Traders have to be very wary of guessing when a powerful correlation like the one between bonds and stocks breaks, but the risk/reward can be huge for getting it right, or at least not getting blindsided when it happens. The 10-year yield has bounced off the summer high of 3.5% multiple times this week, so it looks like strong support. If rates break below there, and stocks still can’t catch a bid, it will imply that inflation is only plateauing because of problematic economic deterioration, and thus, not a reason to celebrate. Judging by how the dollar is well below its summer high, and the dollar led bonds the past 18 months, yields look poised to fall.