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In my April column, I argued that we were due for a correction in the stock market. Since then the market rallied and came right back down. We're essentially trading where we were a month ago.

This does not make for a victory in the call for a correction. But it does show that the market's 5% surge in late April and into early May was unsustainable. I believe we are still in the middle of a corrective move in the market.

On a very short-term basis of one to two weeks, we're just about oversold based on the Overbought/Oversold Oscillator. However, on an intermediate-term basis, we're still overbought. I believe that is likely to make for a market that finds itself unable to make progress on the upside and one that may be vulnerable to more downside as we head into the month of June.

Bonds ... Treasury bonds

However, to me there's a more interesting development taking place in the bond market. In April, one of the reasons I believed the market would correct was a move up in interest rates. At the time, the yield on the 10-year Treasury note was around 2.75%. It reached 3.39% on an intraday basis in early May.

That was when market participants noticed interest rates had risen quite a bit, and they got spooked, giving us a decline of 5% in the S&P 500® Index in just one week. Since then rates have backed off to around 3.10%.

Back in early January, when interest rates were at their lowest point in two years (point A on the chart), a survey conducted by Consensus Percent of Bulls on Bonds showed that over 75% of respondents were bullish on bonds (believing rates would go down more). You can see that was the low in interest rates.

Source: Helene Meisler, as of May 15, 2009.

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Now that rates have gone up, we find almost exactly the opposite to be true: only 25% of survey respondents believe rates will go lower. Point B on the chart represents the last time we had only 25% of this survey's respondents bullish on bonds (bearish on interest rates). You can see that was in mid-2007, when rates were around 5.20%--basically the high "tick" for recent yields.

'Tis the season

I'm not one to put much emphasis on the seasonal trade because I've seen it work and not work. However, I did go back and discover that for each of the past five years interest rates peaked in May or June. You can see that noted on the chart below, which follows the yield of the 10-year Treasury note.

Source: Helene Meisler, as of May 15, 2009.

In early May, yields popped and bond prices tumbled. It's my view that we will once again see interest rates decline over the course of the next few months, perhaps back toward 2.80%. If you are the sort who buys CDs, it's a good time to lock in a high rate. In addition, a falling interest rate should help mortgage rates stay down, since they have been rising.

While in the past low yields have been bullish for equities, lately high yields have been bullish. It appears there is no correlation between yields and equities at the moment. As I still believe we are in a correction, you can't trust this indicator to steer you right.

Since my column in April, the stock market rallied before pulling back to where it had been exactly a month ago; I believe we are still undergoing a corrective move in the market.

In early May, the yield on the 10-year Treasury note seemingly hit a peak at 3.39% before backing off to around 3.10%.

I believe Treasury rates are headed back down in the next few months, possibly as low as around 2.80%.