NEW YORK ( ETF Expert) -- Investors who own individual municipal bonds, real estate investment trusts, corporate bonds and/or preferreds may not see the day-to-day volatility of their holdings. For one thing, individual bond prices may not update regularly on web sites; similarly, those who do not value the liquidity of ETFs are less likely to watch price movement of their individual REITs and/or preferred stocks.On the other hand, ETF enthusiasts tend to be folks who have a plan to sell. They're not married to their investments. In fact, if an asset class is trending significantly lower, they may leave the asset class until it comes back into favor. In essence, exchange-traded fund fans are less inclined to "buy-n-hold." The fact that you can trade ETFs is frequently regarded as an advantage. However, there are times when the power to decide when to hold and when to fold serves as a double-edged sword. For example, the recent upswing in interest rates initially created a rational market-based response whereby rate-sensitive income producers (e.g., high-yield bonds, preferreds, dividend stocks, etc.) fell in price. In the ETF world, however, initial selling promoted a less rational firestorm to dump REIT ETFs and emerging market bond ETFs at all costs; rates hadn't surged high enough to justify the level of hostility that occurred. (See this article.)
Meanwhile, the CBOE S&P 500 VIX Volatility ( VIX), a gauge that typically moves in the opposite direction of the SPDR S&P 500 Trust ( SPY), is holding above a 50-day and 200-day moving average.
What may be more remarkable than the interest rate story is the high probability than something else is weighing on common stocks -- something other than the overstated possibility of Fed tapering its bond binge. In other words, the 10-year yield may dip back to 2% or below in the near future, but that may not be enough to encourage a stock rally. The other story? The Japanese yen may cease to depreciate further and begin recovering against world currencies; that would effectively end the "carry trade" used to finance the purchase of higher-yielding and higher appreciating assets. In fact, the CurrencyShares Yen Trust ( FXY) often moves in the opposite direction as the SPY. Granted, it still makes sense to keep an eye on the direction of interest rates. If the 10-year moves significantly higher than 2.25% (a possibility that I regard as improbable), rate-sensitive income producers would feel even more pain. Still, if you really want to know whether U.S. stocks can withstand the pressure cooker, track the FXY. If the yen tracker manages to stay above its intermediate-term, 100-day trendline, and climb even higher, U.S. stocks may find themselves in the same downward spiral that other asset classes have already experienced. Follow @etfexpert This article was written by an independent contributor, separate from TheStreet's regular news coverage.