What a Week: Bond-Bound

The 10-year Treasury note, meanwhile, rose 16 basis points this week, its worst weekly price performance in two years, according to Bloomberg. Yields on the two-year note rose 3 basis points to 5%, while the yield on the 30-year bond rose to 5.21%. (Treasury yields move inversely relative to price.)

Higher Treasury yields prompted a reassessment of the relative attractiveness of stocks vs. bonds, fueling the midweek selloff, which was most intense in rate-sensitive financials like Goldman Sachs (GS Quote), utilities like Exelon (EXC Quote) and housing-related stocks like Pulte Homes (PHM Quote).

But bullish strategists are sticking to their forecasts.

"We believe valuation is still quite attractive with our trailing P/E vs. bond yields and equity risk premiums model still intimating a very bullish sign for positive market appreciation over the ensuing 12 months 100% of the time, looking back 45 years," writes Tobias Levkovich, chief U.S. equity strategist at Citigroup.

Levkovich, who recently raised his 2007 target for the Dow to 14,400, says "previous panic readings [on his proprietary sentiment model] argue for attractive market gains in the next six months with better than 90% historical probability."

Michael Darda, chief economist at MKM Partners made similar comments on Friday's The Real Story podcast, saying Treasury yields would need to approach 6% before really threatening the stock market.

"Our valuation work shows that stocks remain about as cheap [relative to bonds] as they were expensive during the year 2000," he says.

Speed Kills

Friday's recovery aside, this week's action shows what happens on Wall Street when expectations change quickly. In this case, the change was over perceptions of the Federal Reserve's presumed next move.