Has the Reallocation Trade Begun?

Something is happening, something has changed this week. For years, investors have been hiding in relatively risk-free assets: U.S. Treasurys. They have paid a terrible price for that stability: measly yields.

But this week is seeing the beginnings of a reallocation trade going on from fixed income to equities.

10-year yields up 14 percent this week with the S&P 500 up 2.5 percent, the biggest weekly gain in 12 weeks?

Larry Fink at BlackRock said go 100 percent into equities some weeks ago. Others may think this is a bit premature: stocks volumes have been slightly elevated this week, but not dramatically. Seems money may be going out of bonds and into cash as an intermediate step. One thing's for sure: hedge funds are getting killed on their short positions.

I know higher rates and stronger dollar are headwinds for stocks long-term (it's a form of tightening), but stocks are so underowned and unloved I think there could be more to go with even modest improvements in the economy.

A big beneficiary of higher rates — and a steepening yield curve — is bank stocks, which had some of their biggest weekly gains in years this week. Of course, more money being returned in the form of dividends and buybacks is also a big plus.

Here's my point: investors don't want to hide in risk-free assets if the economy is changing, if the regulatory stranglehold on banks is being reduced.

Finally, is the Fed throwing in the towel? Remember they said they would keep rates lower into 2014, but hawk Jeffrey Lacker at the Richmond Fed said today that rates would likely have to go higher in 2013.

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