24 Aug Exciting times…
Today has already been one of the most significant days in the financial markets in history. The DOW Jones Industrial Average fell nearly 1100 points in early trading, only to rebound and recover most of its losses. The drop was following through on Friday’s more than 500 point loss that was sparked by a global stock sell off. China is at the core of this mess, with the crisis in that region continuing to worsen day by day. The reality is truly bleak within the overall Chinese economy. The continued spillover effect into the U.S. Markets is likely, increasing the probability of continued volatility for both stocks and bonds.
Mortgage bonds have also had severe swings this morning. They opened up well above their 200 day moving average only to be pushed back below a few hours later. The significant swing lower was a result of the stock market building strength and recovering losses. This pulled money out of bonds as investors looked for bargains in the stock market. If bonds are not able to close above their 200 DMA, that would be a sign of weakness for the near term bond market. Given the losses in stocks over the past week, bonds should have easily been able to make a more significant run higher. The fact that they haven’t yet shows that investors are hesitant to make investments in the bond market ahead of a Fed rate hike.
With bonds now turning negative, we will maintain our locking bias. If bonds are able to close above their 200 DMA, we could see a nice run higher. These are exciting times in the financial markets. Keep an eye out and be ready for continued volatility.