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As the 10-year hits 3 percent, one strategist sees an identity crisis in the stock market

Keris Lahiff

Bond yields at four-year highs are seen as a positive signal of a strengthening economy. But investors have taken it as a negative signal for stocks.

These moves are causing an identity crisis for equity markets, says Scott Redler, chief strategic officer at T3Live.com.

"It's a good sign for the economy, but if you recall, the bull market is about 9 years old. For about five, six years of that bull market, they were buying bad news because the markets loved accommodation," Redler told CNBC's " Futures Now " on Tuesday.

"We don't have much of that anymore, so now it's time for the market to stand on its own two feet," he added. "At this point, they're actually selling the good news, which you don't want to see."

Since the financial crisis, stock markets have generally acted negatively to any hint of tightening monetary policy from the Federal Reserve. The current bull market began in March 2009, less than six months after the central bank cut interest rates to near zero.

Expectations of a more hawkish Fed have sent bond yields higher this year. Markets now have to determine whether they are prepared for rates to continue their upward march, Redler said.

"When we went above 3 percent, the market was trying to figure out if it could handle it, and at this point we're seeing some bearish behavior," he said.

The yield on the 10-year Treasury bond topped 3 percent on Tuesday for the first time since January 2014.

"If you look here at the 10-year yield you'll see that we do have a pretty big technical breakout," said Redler. "We took out 2.6 percent, and then we took out the highs of the year. So when that happens, the market goes through a little bit of market discovery."

Look to the banks to determine if markets are taking a rise in rates in stride, according to Redler.

"The banks are supposed to do well when rates rise but the banks that started positive went red" on Tuesday, he said. "If this $104 doesn't hold here, which is the 21-day moving average, that means the banks are not going to help the active bulls, and that could put more pressure on the market."

The KBW Nasdaq Bank Index fell below its 50-day and 100-day moving average in the first half of March. It has managed to hold above its 200-day moving average of $103.82. It currently sits 4 percent above that level.

"When you put this all together, and you go to the S&P cash which is the main proxy for all the indices, you see this wedge formation," said Redler. "What this means is you have a pattern of indecision after a major move."

The next critical support level for the S&P 500 is 2,580 to 2,600, he added. The S&P 500 currently sits at 1.3 percent to 2 percent above that range.

If yields break further above 3 percent and the index breaks below that support, Redler sees the potential for "more downside action." The next support level is at 2,440.



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