Don't look now, but the 'Great Rotation' may be here

Ever so gently, sparingly and delicately, the long-awaited "Great Rotation" may finally be upon Wall Street.

Like a shadowy urban legend, the 'rotation' phenomenon, which describes a mass shift of money out of bonds and into stocks, never quite has the impact many analysts warn about.

Although in 2014 the trend was clear—the S&P 500 Index rose alongside bond prices—until very recently, very much the opposite has transpired. The price of the US 10-year Treasury note had fallen by 3 percent, while the S&P 500 rose less than 2 percent.

The open question is the extent to which this has been driven by investors fleeing bonds in favor of equities. And, further, whether investors will begin to pursue such a strategy en masse.

Such a move has long been hypothesized (and memorably encapsulated in a Dickensian Bank of America Merrill Lynch analysis). The idea holds that investors would eventually embrace risk, and become less satisfied with low bond returns as the economy recovered and the Federal Reserve tightened policy. That didn't exactly happen, with the 10-year yield managing to stay below 3 percent.

But in 2015, just when the meme appeared to disappear from the market's radar, it may actually be coming to pass. Last week, investors yanked nearly $6 billion out of global funds, the largest such outflow in nearly 2 years.

The bond and equity markets are forging "a whole new personality completely," commented Jim Iuorio, a Chicago-based trader with TJM Institutional Services.

Whereas stocks had been responding positively to low yields—meaning that bond prices (which move inversely to yields) enjoyed a positive correlation with stocks—now the specter of rising rates is causing "big, huge chunks of money to exit bonds and look for a new home. And since stocks are still a reasonable place to be, they end up in stocks."

Similarly, Nicholas Colas of Convergex observed in a Friday note that "at the moment, the volatility in fixed income markets is pushing the marginal investment dollar into equity products."

That would be the fear-based interpretation. The more optimistic read is that in the longer-run, yields and stocks are rising together because the American economy is improving.

As the economy heats up, so too should inflation, which means investors must demand greater yields on their bonds in order to avoid losing money on a "real returns" basis. Last week, producer prices jumped to their highest in nearly 3 years, boosted by surging food and gas prices.

Inflation, of course, stings consumers, who end up paying more for the same amount of goods. However, stocks respond positively to profit-boosting growth that many companies see in an environment of rising prices.

'Too little, too late'?

Then again, equities aren't exactly screamingly cheap at the moment, with valuations somewhat above historical norms.

"If you're leaving the world of bonds and going to put your money in the world of equities, you're a little late there, pal," said Kim Forrest, a senior equity analyst with Fort Pitt Capital Group.

Forrest happens to be moderately bullish on equities. Still, she takes a dim view of the idea that investors should run from bonds simply because they're falling, and dive headlong into stocks because they're rising.

"When people put a lot of money in bonds because they're afraid, maybe that's the time you should be buying stocks"—rather than when many are doing the opposite.

But for Jimmy Lee, CEO of the Las Vegas-based Wealth Consulting Group, which manages about $500 million, investors aren't getting into stocks so much as moving slightly up the risk spectrum.

"I think there is exiting of some types of bonds, but not quite the bond market in general, at least not just yet," Lee said. "Year-to-date, intermediate-term, high-quality bond are the asset class that have seen the most net flows."

Either way, rates do seem liable to rise further as the Fed finally moves its short-term rate target off of financial crisis levels. The latest clue about the Fed's timing on that front will come on Wednesday, when the Federal Open Market Committee releases its latest statement and forecasts.

Read MoreFed to move closer to policy change in week ahead

For long-term holders of bonds, nothing will change, no matter how high rates go (and how low prices fall).

That's because, absent a default, the yield-to-maturity promised on the day the bond was bought is the yield-to-maturity one receives. Rate rises only affect those who want to sell their bonds before maturity.

For investors planning to do so, Forrest has some very basic but easily forgotten advice about what to do with the proceeds of that sale.

"You have to understand what your risk tolerance is, and what the money's for," she said. "Stick to your plan, as opposed to chasing returns."

—By CNBC's Alex Rosenberg.

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