25 Nov Cautiously floating bias
Stocks came out strong again this morning, once again setting new all-time intra-day highs. Bonds also opened the day higher, as both the stock market and bond market are still benefiting from foreign investment after The European Central Bank increased their purchase of Asset Securities (similar to our Quantitative Easing). This has pushed money out of the European markets as they search for higher investment returns. US stocks and bonds look attractive when you consider the strength momentum of the US dollar as well as both bond and stock prices moving higher. When you add the benefit of each, there is an opportunity for foreign investors to profit handsomely by investing in US stocks and bonds.
The preliminary reading for 3rd quarter of 2014 GDP was reported at 3.9%. This was shockingly higher than the 3.3% anticipated and better than the advance reading of 3.5%. This is a very healthy read on economic growth and brings the yearly number just over 2%. Given the importance of GDP to mortgage interest rates, it is a good sign that rates didn’t jump higher after the strong report was announced. This shows the bullish sentiment in the bond market as well as the benefit of foreign investments into the US markets.
Bonds have moved higher and are now well above the 25 day moving average in the middle of a wide trading range. More importantly, the 10 Year Treasury Note Yield has broken to the downside beneath the 25 day moving average. If yields can remain beneath the 25 DMA it will be positive for mortgage bonds and interest rates. Given the continued bullish signs in the bond market, we will maintain our floating bias. However, if you float you must watch the markets closely. Weakness can develop quickly, changing market sentiment. Should weakness appear, we will quickly switch to a locking bias. Volatility could very well come back into vogue soon, which will likely impact the stock market. The current path of stocks is not sustainable long term. Therefore, we know change will be coming soon.