Stocks Say 'No Deal' to M&A

"In addition to a general belief that the market may be overbought, higher bond yields and questions about the likelihood of Fed rate cuts have also been making equity investors nervous," wrote Bob Doll, global chief investment officer of equities at BlackRock, which has more than $1 trillion under management.

On Monday, the benchmark 10-year Treasury fell 5/32, its yield rising to 4.89%. Meanwhile, the yield on the two-year note rose to 4.98%, just 2 basis points from 5%, a level it hasn't closed above since mid-August.

"Should the two-year pierce 5%, an expectation will develop for other Treasuries to do the same," writes Tony Crescenzi, chief Treasury strategist at Miller Tabak and a RealMoney.com contributor.

The notion of the whole yield curve moving higher while remaining inverted (meaning short-term rates have higher yields than longer-dated maturities) could be a worst-case scenario for the bulls. Such a development would keep pressure on lenders' profits and put additional strain on the housing market, which is showing tenuous signs of emerging from its slump.

The optimistic scenario, on the other hand, is that the financial markets have already largely priced in a more hawkish Fed and faster economic growth. If so, stocks and Treasuries may rally in tandem this week, presuming no major shocks on either the macro or earnings front.

"What you've got here is a standoff between the potential of rates to go up more and money to come in" to stocks, says Bittles. "My guess is it'll be a little while longer before the market focuses on something positive, [but] I don't think it's going down and rates are not going up" dramatically higher.

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