Stocks rallied in late day trading yesterday, causing the expected upward pressure to mortgage interest rates. However, stocks opened the day weak and are currently close to the intra-day lows of yesterday. This continued weakness and volatility in the stock market brings into question whether we are experiencing early signs of a broader correction, or if this is just a healthy retracement that will be followed by a strong run in the stock market. Since the losses are still within the boundaries of a healthy retracement, we must assume that is the case. Corrections are rare, but retracements are common. We have a greater chance of stocks making a strong come-back than having this be a correction. However, the longer this goes on, the more dangerous the situation for the US stock market. Further, stocks have not been this far beneath their 200-day moving average in years. This is certainly a huge risk to stock investors.
Weak housing data has fueled anxiety over the US housing market. Higher mortgage interest rates and rising home prices continue to threaten the stability of the housing sector. Housing is generally a leading indicator of a recession. However, many economists don’t see the housing market as falling in the next recession. Personally, I don’t agree with such experts. I believe we are currently in the early stages of a housing correction that will either lead to lower housing prices and/or mortgage interest rates falling. I don’t believe the housing market will be able to sustain continued rising interest rates combined with a rapidly appreciating housing market. Something will be forced to give.
Again, we need to be prepared for stocks to make a come-back. We will maintain our locking bias.