The bond market splashes some cold water on the stock market’s attempt at upside follow-through to Monday’s strong but familiar one-day pop. Stocks still clinging to gains but are off the morning highs. The formula for continued equity strength is pretty clear in the near term: bearish sentiment, extreme low equity exposures among institutions combined with typical seasonal strength into and beyond a midterm election and beatable earnings expectations. But all of this can only likely play out with the permission of the bond market, meaning the 2-year Treasury yield must stop making new highs, and the 10-year yield needs to treat 4% as a spot for a prolonged pause if not as an absolute ceiling. All was in gear to start Tuesday until yields started leaking higher, with the two-year edging up toward the 4.5% high-water mark and 10-year pushing above 4%. It happened just as the S & P 500 revisited the “island” left by its early-October rally. The October high of 3,806 remains an initial mile-marker with tests all the way up to the 200-day average around 4,150. If it sounds simplistic, it is, and nothing says this cross-asset push-pull will remain the dynamic for long. After all, the S & P 500 in mid / late June was at the same level today, with the 10-year under 3.5%, so there is no required synchronization of index versus yield level. But the direction of influence surely now seems yields up / stocks struggle to make headway. But if bonds reflect anticipated Federal Reserve aggression and turn good economic news into bad financial-conditions impact, bonds are the prime mover. Speaking of good, or at least better than feared, economic news, the Atlanta Fed GDP for the third quarter is at a 2.8% annual pace, and industrial production was stronger than forecast. Housing remains the strongest undertow, with homebuilder sentiment in freefall. Yet, builder stocks are up today. They are 12% off their low and have been outperforming for six months. Is the pain priced in after a 35% dump in the iShares US Home Construction ETF (ITB)? The Bank of America Global Fund Manager results confirm what’s been evident for a while: Professional money is in a defensive crouch, under-invested in risk assets, nursing cash, waiting for a macro “all clear,” whatever that might look like. This is a precondition for a serious rally that challenges the entrenched downtrend, but not in itself enough to make one happen. We also have an options expiration Friday that could exacerbate any rallies as the mechanics of hedging work to get the abundance of outstanding put options to expire worthless. Traders are well aware the seasonal forces are also potential tailwinds, though again this is a backdrop and not a catalyst. Charts like this showing the average mid-term election year pattern (weaker into October and then sharply higher into December) are in heavy rotation right now, for better or worse. Market breadth is solid but looks unlikely to match Monday’s 90% upside volume performance, which would keep certain momentum indicators from firing off a bullish signal. VIX remains sticky, with bond volatility at eye-watering levels and twitchy intraday moves. It’s good to have a high wall of worry for stocks to climb, barring serious market instability. Credit is hanging in fine today.